PRIVATE BUSINESS

Transas Group Bill (By Order)

Order for Second Reading read.
	To be read a Second time on Wednesday 21 May.

Oral Answers to Questions

OFFICE OF THE DEPUTY PRIME MINISTER

The Deputy Prime Minister was asked—

Social Housing

Desmond Swayne: If he will make a statement on his policy for (a) improving the quality of and (b) increasing the quantity of social housing.

John Prescott: On 5 February I launched the sustainable community action plan. It marks a step change in our approach to housing in communities. We will invest £22 billion over the next three years, including £5 billion for affordable homes and £2.8 billion to bring local authority housing up to decent housing standards.

Desmond Swayne: My district council has been attempting to sell a mobile homes park in Ringwood to its residents, who in turn have made an enormous effort to raise the mortgage money. The deal has been jeopardised by the abolition of local authority social housing grant. What can I say to the residents of Stillwater mobile homes park to reassure them that they will not be left behind, and that they will get a fair deal?

John Prescott: As the hon. Gentleman knows, the local authority housing condition grants were not being used in a proper manner. Some authorities were not using them to provide the social housing for which they were intended. I explained to the House why I had changed the arrangements in the community plan. Difficulties were caused for projects that were half finished, so we have applied different arrangements from those that are in the process of implementation. The project referred to by the hon. Gentleman does not fall into that class, and I assume that a certain amount of planning took place in the hope that the money would be available.
	On balance, I think that our judgment was correct. I think that what the hon. Gentleman should tell his constituents is that the argument was very much against the implementation of the right-to-buy policy in this instance.

Debra Shipley: Will my right hon. Friend explain exactly how social housing will be improved by the warm homes initiative?

John Prescott: In the community programmes we allow for money not just to build houses but to enable them to meet the new energy standards that we are applying. That is not happening in most parts of the country, and I shall ensure that greater priority is given to it.

David Davis: The Deputy Prime Minister has claimed in the past that abuses of the right-to-buy scheme reduce the availability of social housing for new tenants. On Monday, the Government introduced their plans for savage cuts in the discounts available to right-to-buy tenants. Are those cuts designed to stamp out abuses, or simply to deny the right to buy to thousands of poorer tenants?

John Prescott: I think the right hon. Gentleman would agree that where there is abuse we should deal with it, because this is the taxpayer's money, but the reduction in interest rates under our policies—which is considerably greater than any reduction that occurred when his party were in government—has allowed more than 1 million people to buy their houses. The subsidy of nearly £40 billion simply allowing people to buy houses, rather than allowing the public stock to be improved or increased, worked against a good housing policy.

David Davis: May I drag the Deputy Prime Minister back to the question? Cutting discounts by more than half will not hit the abusers; it will hit the poorest tenants. Only on Monday the Under-Secretary of State, Office of the Deputy Prime Minister, the hon. Member for Harrow, East (Mr. McNulty), confessed that these savage cuts were designed to reduce the number of families exercising the right to buy by 9,000—and it will be 9,000 of the poorest families.
	Most of those families cannot afford to move out of social housing, so few if any of the homes will be released to new tenants. According to the figures given by the Under-Secretary of State on Monday, only about 30 homes a year will be released for new tenants in London. Denying the right to buy to 9,000 families will deny the public purse £900 million—about enough for 5,000 new social homes.
	Will the Deputy Prime Minister confirm that what he is doing is not only shattering the hopes and dreams of 9,000 poor council tenants who wanted to own their homes, but denying thousands of homeless people their chance of occupying social housing?

John Prescott: If the last Administration had been seriously interested in increasing the housing stock and the availability of social housing, they would not have reduced the moneys available to local authorities to provide social housing, year on year. Their sole housing policy was to provide the right to buy. We have restricted that by reducing the discounts in housing crisis areas. We think that that policy is right, and we intend to pursue it.
	I repeat: I think that our policy of reducing interest rates is better than spending £40 billion on subsidising houses simply to implement the principle of the right to buy for 1 million people, and it increases the number of people owning their homes by the same amount. The right hon. Gentleman should have discussed that during his most recent bonding session with his leader.

Planning System

Gareth Thomas: What resources he will give to local authorities to speed up the planning system.

Tony McNulty: The Office of the Deputy Prime Minister has a comprehensive planning reform agenda. We are tackling the structure, processes and culture of the planning system. We accept that authorities need more resources to deliver service improvements, so we are making an additional £350 million available to them over the next three years for planning, of which £50 million is already being distributed this year.

Gareth Thomas: I am grateful for that reply, but does my hon. Friend accept that the UK's renewables industry has often faced very significant delays in obtaining decisions through the planning system, whether favourable or unfavourable? Given the considerable potential of renewables to deliver the significant environmental benefits that the Energy White Paper refers to, the extra jobs that could be created in the manufacturing and offshore industries, and the new income streams for rural areas that renewables could deliver, is it not now time that the planning system had a presumption in favour of renewables, rather than the neutral position that it currently takes?

Tony McNulty: I commend my hon. Friend for his work on behalf of the all-party group on renewable and sustainable energy, and for his interest in this area. Planning policy guidance 22, which is 10 years out of date, does need updating. Among other things, the criteria must include greater clarity and less delay, but I am afraid that it would be totally wrong for the planning system to have a presumption in favour of any type of development.

Edward Davey: For the benefit of those of us who could not serve on the Planning and Compulsory Purchase Bill Standing Committee, can the Minister tell us when the House will consider it on Report? He says that he wants to speed up the planning system, yet the Committee finished its proceedings four months ago. Is it not true that delays in the planning system are more down to central Government than to local authorities?

Tony McNulty: I would very much like to tell the hon. Gentleman that he was sorely missed in Committee, but he was not. It is certainly still our intention to get that Bill approved and on the statute book as soon as we possibly can.

Crispin Blunt: In Redhill—[Hon. Members: "Hear, hear."] That is the only example of turkeys appearing to be in favour of Christmas—a Christmas that I am trying to arrange for them. In Redhill, a major development by Linden Homes, involving more than 500 homes and including a significant amount of social housing, has been mired in the planning process for more than a decade and a half. It is running into planning problems with Network Rail, as access to the site is required from underneath a railway line. I am meeting representatives of Network Rail and Linden Homes next week, and I should be very grateful if the Minister could get an official from his Department to observe that meeting and report back to him on how Network Rail is going to assist in getting us through the planning process.

Tony McNulty: Strangely, in recent weeks I have listened far more carefully to the hon. Gentleman than previously. However, I am afraid that I am unable to comment on specific planning applications, as they might end up on my desk or those of my colleagues.

Bill Olner: Although I welcome the extra resources that local authorities will get during this period, is the Minister prepared to consider the financing of local authorities that have a lot of difficulty in, and spend a great deal of money on, removing illegal encampments of travellers? Will he please meet a delegation from my local authority, which has spent well in excess of £100,000 in legal fees just to ensure that the planning process runs smoothly?

Tony McNulty: I accept that this is a serious issue, and I have had numerous meetings on it. I am more than happy to meet a delegation from Nuneaton to discuss it further.

Retail Developments

Michael Fabricant: If he will make a statement on his policy on the construction of retail developments on the outskirts of urban areas.

John Prescott: I refer the hon. Gentleman to the parliamentary statement "Planning for Town Centres", which was issued on 10 April. It summarises and clarifies the Government's planning policy for town centres and retail development. We remain firmly committed to focusing retail development in town centres. This policy is working, and we now have more in-town than out-of-town development than at any time since the mid-1980s.

Michael Fabricant: I thank the Deputy Prime Minister for his answer, but does he recall the application for a retail development in the mining town of Burntwood, in my constituency? Some 10,000 people signed a petition in favour of it, the inspector approved it, Lichfield district council approved it and Staffordshire county council, which is Labour controlled, also approved it. Why did the Deputy Prime Minister refuse it?

John Prescott: I think that the hon. Gentleman is well aware of the ruling that I cannot comment on a matter that is under legal challenge. Every Secretary of State would have to give the same reply to the House. It certainly applies in this case. The hon. Gentleman is usually on record as a supporter of out-of-town development. He has obviously changed his mind: we have not.

Bill O'Brien: May I express my appreciation of the Deputy Prime Minister's work to regenerate urban town centres? Does he accept that the urban renewal programme that he has put in place could be another vehicle to help regenerate town centres? Could guidance be given to regional development agencies and regional assemblies to help them to revitalise urban town centres?

John Prescott: My hon. Friend knows that that is a key priority for the Government. We have concentrated on urban development, particularly retail development. In 1992, about 190 out-of-town shopping applications were granted, which rose to 1,200 in only five years. We are now concentrating more on the development of in-town urban areas—a decision that was greatly influenced by advice from the regional assemblies and regional development agencies. We greatly encourage them to adopt that policy.

Housing Renewal Pathfinders

Jeff Ennis: What impact housing renewal pathfinders are having on the areas they cover.

Barbara Roche: We have invested £2.66 million in each scheme so that long-term, robust plans to revitalise communities can develop. The first tranche of £4 million funding is available for radical action to begin this year, and more for those moving ahead with completed plans.

Jeff Ennis: Is the Minister aware that communities such as Thurnscoe, East and Mexborough in my constituency are already benefiting from the funding that she is providing? The number of empty and void properties in my constituency, which can attract antisocial behaviour and are often the cause of disorder and nuisance, is diminishing. Does the Minister agree that if we are to continue to be successful in the pathfinder areas, we must adopt a bottom-up approach that will give local communities a direct input into resolving the problems in the housing areas where they live?

Barbara Roche: I agree and I know that the Under-Secretary of State, Office of the Deputy Prime Minister, my hon. Friend the Member for Harrow, East (Mr. McNulty) visited the pathfinder in my hon. Friend's constituency—and was impressed by what he saw. It is essential to secure community involvement and the schemes are predicated on the fact that the community will be involved. It is also right to target measures to reduce antisocial behaviour.

David Curry: Does the Minister accept that many pathfinder areas are precisely those with a predominance of houses at the bottom end of the council tax bandings? If the rebanding goes ahead and a half-A or minus-A band is introduced, what will be the impact on councils of a significant increase in council taxes marginally up the bands? Will the nearly poor be required to pay yet again for the very poor?

Barbara Roche: The right hon. Gentleman makes important representations. He will know that no decision has been taken on rebanding, but I shall view his representations as part of the process.

Gordon Prentice: I welcome pathfinders in areas such as my own where the housing market has completely collapsed, but rather than more plans, strategies and assessments, people want to see a visible sign of change on the ground. Can the Minister assure me that the pathfinder area in Burnley and Pendle will be adequately resourced so that crumbling and rotten houses can be torn down?

Barbara Roche: I have to say that that is exactly what is happening. Action is being taken on the ground. I have seen the pathfinders in action and demolition is taking place. Some of the old crumbling houses are going; new mixed housing is taking its place; and communities are being revitalised. The involvement of local people and action plans are necessary to achieve that.

Regional Government (North-West)

Nicholas Winterton: If he will make a statement on plans for regional government in the north-west of England.

Nick Raynsford: We have asked for further responses by 16 May to our soundings exercise on the level of interest in each English region in holding a referendum on an elected regional assembly. We will announce shortly after that date which region or regions will proceed first towards referendums.

Nicholas Winterton: While I am grateful to the Minister for his reply, is he aware that polls suggest that 78 per cent. of people in the north-west know "not very much" or "nothing at all" about the Government's proposals for regional authorities, and that only three out of 10,000 have responded to the soundings? Does that make it clear to him that the north-west is not interested in regional government? We do not want more bureaucracy. People identify with their districts, boroughs or counties, and I repeat that we do not want regional government and all the expensive bureaucracy that goes with it.

Nick Raynsford: I am always a little suspicious of polls and I prefer to look at the evidence of individuals who have responded. The hon. Gentleman will probably be interested to know that we have so far had 2,535 responses from the north-west region and 1,530 of those come from his county of Cheshire. [Interruption.] He may have had something to do with that. We will consider the responses carefully after the deadline, which is this Friday, and then my right hon. Friend the Deputy Prime Minister will make his decision.

George Howarth: Fond as we are of Macclesfield on Merseyside, does my right hon. Friend agree that a Greater Merseyside authority would make far more sense than a north-west authority?

Nick Raynsford: We believe that the people of the region should take the decision, and that is why we are engaged in the soundings exercise. We will make an announcement on the basis of the soundings on whether referendums will take place and, if so, in which regions. It will then be for the people of each region to decide whether they want an elected regional assembly. That is democracy and choice, and we think that it is a good idea.

Eric Pickles: Does the Minister realise that the level of interest in the north-west is such that the only people who turned up to a recent meeting organised to discuss the issue were a chief executive of a council and his wife? That is not my idea of a good night out. Does he recognise that business, industry and voluntary organisations are pulling away from the existing regional assembly, and does he agree that this is a solution in search of a problem?

Nick Raynsford: I am sure that the hon. Gentleman will be familiar with meetings with a derisory attendance from his experience of Conservative party meetings. We are seeking the views of people via various options, including letters, meetings—if people choose to hold them—and other responses to the soundings. We will take account of the total response. Clearly, if only two people attend a meeting, it would not be given much weight in the assessment of the level of interest.

Andrew Miller: Part of the confusion in the minds of the people in Cheshire, including the hon. Member for Macclesfield (Sir Nicholas Winterton), is caused by the misinformation that has been put out by Cheshire county council. Will my right hon. Friend tell the people of Cheshire that the proposals for regional government would not create a further tier of government, as the hon. Gentleman suggests, but an alternative and much better structure of government?

Nick Raynsford: My hon. Friend makes a good point. We have always been clear that there must be no question that any additional tiers of government or bureaucracy will be created. That is why we have made it clear that, when there is a vote in favour of an elected regional assembly, local government in that region must be reorganised to a wholly unitary structure. Through an amendment in the other place to what is now the Regional Assemblies (Preparations) Act 2003, we have recently provided that people in those two-tier areas will have a say in a second vote on their preferred form of unitary local government. Once again, the Government are giving choice to people in respect of efficient and streamlined administration, and better local government.

George Osborne: The Minister said that he would look at the level of interest in a region. In his response to my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton), he said that he had received 2,000-odd responses from the north-west. What proportion of the total population of the north-west is that?

Nick Raynsford: The hon. Gentleman will know that other people often undertake similar exercises. For example, the Liberal Democrat party and its Focus leaflets will probably get a derisorily small number of responses, compared with what we are receiving. Getting 2,500 responses from people represents a very good level of response—[Interruption.] We look forward to seeing what they say. We will analyse the responses, and take decisions accordingly.

Houses in Multiple Occupation

Andy Reed: What steps he is taking to improve the condition of houses in multiple occupation.

Christopher Leslie: The Government published a draft housing Bill on 31 March, taking forward our commitment to introduce the mandatory licensing of larger houses in multiple occupation, and also a new housing health and safety rating system.

Andy Reed: I thank my hon. Friend for that reply. I am sure that he is aware of the growth in the number of houses of multiple occupation in places such as Loughborough, which is trying to accommodate large increases in the number of students, and of the problems that that is causing in the centre of town. Will my hon. Friend ensure that any licensing system has real teeth so that we can try to tackle the problem and give local residents a real choice? Also, will he look again at the current exemption given to landlords? If their houses are occupied by students, they are exempt from paying council tax. Those landlords run the houses as businesses, and they are benefiting from that exemption.

Christopher Leslie: I hear what my hon. Friend says about council tax. We do not want students to be liable for council tax. In connection with quality of housing, it is precisely because so many students live in substandard housing that we want to extend the definition of HMO to cover student housing, and to allow for the licensing of student landlords in certain circumstances. However, my hon. Friend will be aware that the Conservative party has devised a novel solution to the problem of poor student housing—it is going to cut the number of students.

Henry Bellingham: Is the Minister aware that many small guest houses in Norfolk towns have closed, and have become bed and breakfast establishments and homes in multiple occupation? That has encouraged a lot of youngsters on the dole—the so-called Costa del Dole syndrome. What does he plan to do to discourage that from happening?

Christopher Leslie: The hon. Gentleman mentioned specific issues that affect many seaside towns with areas where many tenants live in single large blocks, in bedsits and so forth. It is precisely because some of those larger houses of multiple occupation need licensing and better management that the Government are introducing the housing Bill that is now in draft.

Social Exclusion

Gordon Marsden: What assessment his Department has made of the links between transience and social exclusion in seaside and coastal towns.

Barbara Roche: The Department has not made a formal assessment of the links between transience and social exclusion in coastal and seaside towns. I know that this issue is a particular problem in my hon. Friend's constituency, and that the local education authority is currently preparing a report on the subject.

Gordon Marsden: I thank my hon. Friend for that reply, and for the interest that she and my right hon. Friend the Deputy Prime Minister have shown in regeneration issues, in Blackpool and other seaside towns. Is she aware of recent research from Sheffield Hallam university showing that there is a significant, continuing and long-term inflow into coastal towns of people with low skills, low employment prospects and, often, poor health? With that in mind, does she agree that we need a more targeted and focused approach? Would she look at the coalfields initiative, and consider whether a similar initiative could be adopted for seaside towns, along the lines of a seaside regeneration taskforce and trust?

Barbara Roche: I should be very interested to read the research produced by Sheffield Hallam university. I agree that the subject of transience and social exclusion is important. That is reflected in the neighbourhood renewal strategy, and my hon. Friend's constituency benefits from that funding. However, I shall certainly look to see what we can do.

Chris Ruane: My right hon. Friend the Deputy Prime Minister was born in the coastal town of Prestatyn, and he will be aware of the dramatic decline of seaside towns in the UK over the past 30 years, which has been as great as that in any steel, coal, rural or inner-city community. What additional help can be given to seaside towns to help them to recover?

Barbara Roche: I have already mentioned neighbourhood renewal funding, and many regional development agencies cover coastal towns and recognise that responsibility. I shall make certain that my hon. Friend's interest is communicated to them.

PRIME MINISTER

The Prime Minister was asked—

Engagements

Tim Loughton: If he will list his official engagements for Wednesday 14 May.

Tony Blair: This morning, I held meetings with ministerial colleagues and others. In addition to my duties in the House, I will have further such meetings later today.
	Perhaps, Mr. Speaker, I could say a word about Monday's bomb attacks in Saudi Arabia. These attacks were a cowardly and disgraceful terrorist atrocity. They will, however, make the United Kingdom and our allies across the international community only more determined to track down terrorists and to stamp out terrorism.
	I would like to offer our profound condolences, those of the Government and, I believe, the House to the victims of the attacks and their families and to the Saudi people. I have sent condolences personally to Crown Prince Abdullah and to President Bush. It has to be pointed out that, although of course, tragically, some of the victims may be American and indeed British, the victims will, as ever with these terrorist atrocities, primarily be Muslims.

Tim Loughton: I am sure that we all wholeheartedly share the Prime Minister's comments.
	Given the whispers around Westminster earlier in the week that the relationship between the Prime Minister and his Cabinet is not so much a meeting of minds but more one of meat and vegetables, can he tell us when there was last a full discussion, in full Cabinet, on the subject of the euro?

Tony Blair: There are regular discussions of Europe and, indeed, of all the issues connected with Europe. I can assure the hon. Gentleman that there will be the fullest possible discussion before the decision on the single currency is announced. The hon. Gentleman knows the timetable for that, as it has been set out by myself and the Chancellor on many occasions.

John Lyons: My right hon. Friend will recall the case of Mr. Sandy Mitchell, my constituent, who is in jail in Saudi Arabia. Mr. Mitchell was accused of bombing in Saudi. Since then, he has continually pleaded his innocence, along with others. Will my right hon. Friend step up the diplomatic and political pressure on the Saudis? In view of the horrific bombing yesterday, it is clear that there must be serious doubts about the conviction of Mr. Mitchell and others.

Tony Blair: As my hon. Friend knows, we remain deeply concerned about the case of British nationals detained in Saudi Arabia, who have been accused of involvement in a series of bombings. He will know that we are working vigorously to resolve that case. The best thing for me to say to him at the moment is that we are fully aware of the concerns, and the best thing for the individuals concerned and their families is that we carry on working in the way that we are to try to secure their release. I promise my hon. Friend that we shall continue to do so.

Iain Duncan Smith: May I join the Prime Minister unreservedly in his comments with regard to the atrocious bombing in Saudi Arabia? I think that the whole House will share his view on that, without question.
	The Prime Minister will be aware that referendums on the European constitution are proposed in up to 10 European member states. Why cannot the British people have one, too?

Tony Blair: For the same reason that we did not hold a referendum on the Maastricht treaty or on the Single European Act. I see no case for having a referendum on this matter. Indeed, many of the allegations made about the impact of the European Convention are scaremongering. The Convention is important because we are modernising Europe as another 10 countries join the European Union. It is important that we make every effort to ensure that the accession of those 10 countries goes ahead, because a united Europe, with those eastern European countries inside the European Union, is in our interests and the interests of Europe.

Iain Duncan Smith: The Prime Minister has to admit that, since he came to power, there have been 34 referendums on issues even as momentous as whether Hartlepool should have a mayor, and he has promised referendums on regional assemblies as well, as the Deputy Prime Minister agrees, but the European constitution will decide how every citizen of this country will be governed. Why will not the Prime Minister simply let the British people have their say?

Tony Blair: The reasons against having a referendum are those that I have just set out, and they apply to the previous Conservative Government too. But in relation to those issues that are said to be the reason why we should have a referendum—for example, that we will suddenly yield up defence or foreign policy to the European Commission—are simply false. European defence and foreign policy will remain intergovernmental, and will therefore remain the property of the Governments inside the European Union. The plain fact of the matter is that the reason why the right hon. Gentleman wants a referendum is to vote no to enlargement in order to vote no to the European changes that are taking place, because I am afraid that, under his leadership, the Conservative party remains utterly and implacably opposed to Europe.

Iain Duncan Smith: It may have escaped the Prime Minister's notice but the reason why I want a referendum is that the British people can say no. [Interruption.] Oh yes, and the reality is that everybody else thinks that the same idea of the British people having their say should exist. He knows that the president of the Convention says that that should be a necessity, as does everybody else. We know that the British people overwhelmingly want to have their say. The right hon. Gentleman shakes his head, but it is true. Has the Prime Minister become so out of touch, so arrogant, so reliant on a small group of people—oh yes—and so reliant on a small group of friends that he will not let the British people have their say?

Tony Blair: What is very clear, as the right hon. Gentleman has just admitted, is that he wants people to say no to European enlargement. That will mean that those—[Interruption.] He has just said that he wants them to be able to say no to the question, and he would be leading the campaign against it. So what we now know from the Conservative party is that it is against the enlargement of the European Union and that it is against those new countries coming into Europe because, under his leadership, the Conservative party is against Europe. That is a disaster for jobs and industry in this country.

Iain Duncan Smith: The reality for the Prime Minister is that he will not trust the British people. Let them be the judges of what they want. The Convention will include foreign policy, home affairs, transport, criminal law, asylum and many other issues. Why cannot they be allowed to decide? Is not the reality that a member of his Cabinet said that since the first days when he got to power the Prime Minister ruled by
	"diktats in favour of increasingly badly thought through policy . . . that comes from on high."—[Official Report, 12 May 2003; Vol. 405, c. 38.]
	The Prime Minister has the opportunity to prove that the right hon. Member for Birmingham, Ladywood (Clare Short) and her words are wrong. If he gives the British people their say, he will do that, so why does he not prove her wrong now by saying from the Dispatch Box that he will give the British people the chance to vote on the constitution?

Tony Blair: I have just given the reason. I said why the previous Government did not give people referendums, for example, in relation to Maastricht and the Single European Act. However, when the right hon. Gentleman lists the topics in the European Convention, he is indeed simply listing the topics, but European defence and foreign policy will remain wholly intergovernmental. Therefore, the idea that it somehow changes the nature of this county's foreign or defence policy is simply wrong. The truth is that, after a time of very wise silence on the issue of Europe, the right hon. Gentleman has decided to put the Conservative party back in the position of being opposed to Europe, and it is now opposed not just to the single currency but to accession by the 10 new states. [Interruption.] There is no point in his saying that he is in favour of accession but opposed to the European Convention, which is necessary to make the accession work. If he wants to get up again, let him tell us whether in such a referendum he would say vote yes or no.

Jonathan R Shaw: Yesterday, yet more mass graves of murdered Iraqis were seen. Does my right hon. Friend the Prime Minister agree that forensic evidence was key to building a case against Milosevic for his crimes against humanity? Will he respond to the demands of Human Rights Watch and ensure that forensic experts are sent into Iraq so that relatives can properly identify loved ones and that those responsible for human butchery can stand trial?

Tony Blair: My hon. Friend's question is very sensible. Incidentally, I hope that for those people who had some doubt about the wisdom of removing Saddam Hussein, the reports of mass graves are an indication of how brutal, tyrannical and appalling that regime was, and what a blessing it is for the Iraqi people and for humankind that he has gone from power. On my hon. Friend's specific point, we are looking urgently at how we redouble our efforts to protect the sites and to make sure that we gather the evidence. No matter what the exact forum is in which people should be tried for these crimes, it is undoubtedly true that we need to protect the forensic evidence that will allow us to try them.

Charles Kennedy: On the Iraq issue, on 25 April, the Foreign Secretary said that the United Nations would have a vital role to play in the search for Iraq's weapons of mass destruction. Now, the United States ambassador at the UN has said that the UN will have no role for the foreseeable future. Who is right?

Tony Blair: I have always said that there should be independent verification at the end of whatever finds we make in respect of weapons of mass destruction. I have no doubt that the UN will be involved in that, and what the American ambassador to the UN was saying was simply that coalition forces, who are currently seeking to restore security on the ground, are not going to have the UN back in now, although we are in discussion with the UN and allies as to how we can have such independent verification later.

Charles Kennedy: On 7 March, the Prime Minister said that the United States and our country would not touch Iraq's oil revenues, yet the draft UN resolution gives the United States and us total control over those oil revenues. Does the Prime Minister therefore understand why so many people now feel so let down?

Tony Blair: That is absolute nonsense. Let me explain the situation to the right hon. Gentleman. First, in relation to the UN's vital role, its primary role must be not just in respect of humanitarian aid but in respect of reconstruction in Iraq and the development of a new Iraqi interim authority. Our resolution makes it clear that the UN special co-ordinator is to be involved in all those aspects. Indeed, the preamble to the UN resolution that we have tabled reaffirms specifically the "vital role" for the UN. In relation to the points that he was making in respect of the oil revenues, it is not true that we will be running the oil revenues of Iraq. What we have said is that they should go into an independent fund with an advisory international board, which will have the UN representative on it and representatives of the International Monetary Fund and the World Bank, and that that development fund money should be used exclusively for the people of Iraq. In those circumstances, the idea that the US and the British are getting their hands on Iraqi oil is completely fatuous.

John Cryer: Since the Prime Minister seems to be developing a fondness for taking action against those people who disagree with him, can he set out for the House the precise limits, as he sees them, of free speech?

Tony Blair: I think—[Hon. Members: "Answer."] Well, I think that is a very fine example of what we really want to encourage in this House. With the greatest of respect, in relation to Iraq, or any other issue for that matter, I have not noticed that people have been afraid to speak their minds. They have been speaking their minds in many different places and in many different guises, and long may that continue. Instead of arguing about whether we have free speech or not—which we do—let us argue about the actual details of the policy itself because that is, perhaps, a better argument and debate to have.

Patrick McLoughlin: The Deputy Prime Minister said that he wanted to make local government funding more easily understood. Can the Prime Minister explain why the average increase for Derbyshire districts this year was some £570,000, yet for Conservative-controlled Derbyshire Dales district council it was an increase of £33,000? When will the council tax payer of Derbyshire Dales get a fair deal from this Government?

Tony Blair: Everyone in the hon. Gentleman's area and other areas in the country got a substantial increase in the investment going into education. That is true. We are working on school funding problems in the way that we have explained. However, it must surely be the case that the last thing that Derbyshire or any other part of the country needs is the possibility of 20 per cent. cuts across the board, which is the Conservative proposal. So yes, it may well be true that Derbyshire and elsewhere want more money, but they know that under the Conservatives they will get less.

Russell Brown: Over the last four or five years, a university campus has been established in my constituency with close co-operation between the universities of Paisley and Glasgow, the Open University and Bell college. Student figures in that time have grown to more than 1,000. Can the Prime Minister explain what impact yesterday's announcement by Leader of the Opposition on student fees would have on rural areas such as mine?

Mr. Speaker: The Prime Minister might know how best to answer that.

Tony Blair: I can assure my hon. Friend that we will not be following that policy decision for the simple reason that it would mean an immediate £500 million loss of income to universities in this country. Nothing could be more unfair or more disastrous for universities. It would mean literally—[Interruption.]

Mr. Speaker: Order. Let the Prime Minister answer.

Tony Blair: It would mean 150,000 fewer students each year able to go to university and, at the very time universities need more money, they would lose £500 million. That is not a fair deal. It is a disaster for students and universities.

Angela Watkinson: In answer to my question on 2 April, the Prime Minister assured the House that the future of Gibraltar played no role whatsoever in his negotiations with José Maria Aznar in securing the support of Spain for the war against Saddam Hussein. Will the Prime Minister now assure the House similarly that control over the straits of Gibraltar played no part in those negotiations?

Tony Blair: I can absolutely give the hon. Lady that assurance.

Robert Wareing: Despite what the Prime Minister said about Iraq's oil, is it not the case that at the moment the United States, not the United Nations, has de facto control of the oil? Is it not the policy of the United States that the United Nations should be reduced to the international Mother Theresa in the world, with no real political control whatsoever? Is it not about time that this country stopped appeasing the world domination ideas of Bush and his cronies?

Tony Blair: First, may I congratulate my hon. Friend on a good example of free speech? Secondly, he is wrong—the oil-for-food resolution governs the oil revenues, and is administered by the UN. The idea is to transfer the revenues from Iraqi oil into a special separate trust fund, which will be administered in the way that I have described, with the UN, the International Monetary Fund and the World Bank represented on it. It is to be used exclusively for the interests of the Iraqi people. With great respect to my hon. Friend, we are conducting a negotiation with other members of the UN Security Council, which I hope will be successful. It provides for a vital role for the UN, not in the sense of the UN governing the coalition or the coalition governing the UN, but the two working in partnership.

Iain Duncan Smith: As the Prime Minister pointed out earlier, the atrocious events in Saudi Arabia have shown all of us that the war on terrorism is clearly far from won, reinforcing the need to show in Iraq that we can be a force for good in the region. There is growing frustration that while it took four weeks of a magnificent campaign to defeat the Iraqi regime, after five weeks of peace, there are still serious shortages of food, water and health care in places such as Baghdad. I believe unequivocally that prosecuting the war was right, but how can the allies now avoid the growing charge of being deficient in planning for the peace?

Tony Blair: It is important that we take our responsibilities very seriously to make sure that, having won the conflict, we restore services and, indeed, improve them—in many cases, they were in an appalling state before the conflict. I can tell the right hon. Gentleman that in the south of the country we have gone a long way towards doing that. Improvements are still needed, but the situation is improving all the time. In Baghdad, it has been particularly difficult because the security situation has been difficult. However, there is now a renewed vigour in ORHA—the Office of Reconstruction and Humanitarian Assistance—and I am sure that in the coming weeks we will sort out the enormous logistical problems in dealing with this situation. Naturally, a lot of attention is focused on things that are going wrong, but there also are many things in Iraq today that are going right.

Iain Duncan Smith: In doing that, it is obviously vital that the coalition act within the bounds of international law. This week, the former International Development Secretary, the right hon. Member for Birmingham, Ladywood (Clare Short), made a startling claim that the Government have been acting against the advice of the Attorney-General, yet the Foreign Secretary is on record as saying that they are not. Both have clearly seen the Attorney-General's advice and both cannot be right. To resolve this split, and to show that he or his Government have nothing to hide, surely the Prime Minister should now publish the Attorney-General's advice today?

Tony Blair: It is not the practice of Governments to publish the Attorney-General's advice, and I am not going to depart from that. However, I can point the right hon. Gentleman to the Attorney-General's clear statement last night that the actions of the British Government have been in accordance with international law. Indeed, there is no possibility of our acting in a way inconsistent with international law. That would be wholly wrong—I would not countenance it and neither would anyone else.

Iraq

Tam Dalyell: What instructions coalition forces have received about seizing documents in the Iraqi Foreign Ministry and secret police headquarters that are likely to form the basis of legal action.

Tony Blair: As my right hon. Friend the Secretary of State for Defence indicated on 6 May, UK commanders have been told that evidence believed to be linked to war crimes or crimes against humanity is to be secured so that it may be examined by investigating authorities. I understand that similar instructions have been issued to US forces in Baghdad. Now that the security environment in areas of Baghdad is more permissive, efforts are under way by the coalition to secure and assess the kind of documents to which my hon. Friend referred. However, at the time of entry into Baghdad, coalition forces were naturally engaged in other priority tasks, in particular seeking to stabilise the security situation and minimise loss of life.

Tam Dalyell: Pertinent to the Prime Minister's opening statement on the dreadful events in Saudi Arabia yesterday is the question of why there was no proper custody of documents of such potential importance that they could have thrown light on the alleged existence of weapons of mass destruction or possible links with al-Qaeda. What does that say about the priority, or lack of it, accorded to intelligence?

Tony Blair: The instructions issued to both UK and US coalition forces were to attempt to secure any documents that might be in the possession of the Iraqi authorities. However, when they were first going into Baghdad, their priority was obviously winning the conflict, and they had to pay close attention to the security of their own forces.
	Now that the situation has cleared somewhat, we are trying to make sure that we gather up all the documentation in relation to weapons of mass destruction and in relation to appalling crimes, the like of which we are now seeing. We will obviously want to use those documents in order to show people exactly what happened.
	The premise of my hon. Friend's question is not right. It is not that we did not bother about documents. As the coalition forces were going into Baghdad, the priority was winning the conflict. Now that the situation has cleared somewhat, we are, of course, doing everything we can to gather up the documentation. It is in our interest to do so.

Julian Lewis: The Prime Minister's explanation is inadequate. On Monday the Defence Secretary told the House, in answer to a similar question, that the reason why The Daily Telegraph got its hands on the documents before the coalition forces was that it had journalists on the spot. The true situation is that The Daily Telegraph journalist returned by land to Baghdad from Jordan on 11 April, two days after the fall of Baghdad. He did not go into the Foreign Ministry headquarters where he got the documents until the following Saturday. On the following Tuesday—that is, 13 days after the fall of Baghdad—he told the BBC that
	"Iraqi government ministries are effectively open to anybody who wants to walk in and look for documents."
	That was a straight failure by the coalition, and the Prime Minister should accept responsibility for the failure to get such important documents under our control.

Tony Blair: I cannot comment on what the hon. Gentleman knows—[Hon. Members: "Why not?"] about The Daily Telegraph, as I suspect that his sources in The Daily Telegraph are better than mine. In relation to the documents, as the hon. Gentleman knows, the building in Baghdad was not in the British area of control, but the instructions given to coalition forces from the US and the UK were identical. As far as I am aware, every effort was made to secure the documentation and to secure those buildings. Even two days after the fall of Baghdad—[Interruption.]—even a few days after the fall of Baghdad, there was a desperately difficult security situation, and it is not surprising if the commanders on the ground were paying attention first to the security of their own forces. However, I have no doubt that any documentation that we have managed to secure will be extremely helpful, both in respect of the crimes against humanity and in respect of weapons of mass destruction.

Engagements

Jim Cunningham: Has there been any progress in the implementation of the road map for peace in the middle east between the Palestinians and the Israelis?

Tony Blair: Yes. The road map has been published and the priority must be the implementation of phase 1. That means improved security from the Palestinians, a freeze on settlement activity, and continuing assistance by the international community for reform and humanitarian assistance. I hope that we now have a situation where, for the first time in many, many months—indeed, for the first time in a couple of years—there is the real prospect of progress on the Palestinian issue. I very much welcome the attempts of Secretary Colin Powell and the American Government, working in concert with other Governments, to push the matter forward. We will continue to play our full part in that.

Andrew Murrison: Is it right that foundation hospitals should be based on a discredited star rating system that completely ignores whether or not sick patients get better?

Tony Blair: It is nonsense that the star system does not take account of sick patients and whether they get better. It is based on 10 different elements to the star rating. No star rating system is perfect, but that star rating has enabled us for the first time to make a comparison of hospitals across the board. It is interesting that the Conservative party is not just opposed to the extra investment in the health service; it is now opposed to reform in the health service, as well.

Jim Knight: In October last year, a 15-year-old constituent of mine, Anthony Waklin, was killed by a speeding motorist while cycling through his home village, Wool. The 18-year-old driver concerned already owed £1,400 in driving fines and had no licence or insurance. Last week magistrates sentenced him to a paltry £200 fine and a two-year driving ban. Can my right hon. Friend please assure my upset and concerned constituents in Wool that amendments to the Criminal Justice Bill will prevent such injustices in sentencing from happening again?

Tony Blair: I totally understand the concern of my hon. Friend and his constituents. I should say to them that we have tabled an amendment to the Criminal Justice Bill to increase the maximum penalty to 14 years' imprisonment for the three offences of causing death by dangerous driving, causing death by careless driving while under the influence of drink or drugs and aggravated vehicle taking where death results. The actions of dangerous and irresponsible drivers can be devastating not only for victims and their families, but for whole communities. That is why I think that it is entirely appropriate that we increase the penalties for such offences. I hope very much that the amendment will receive the support of the whole House.

Mark Oaten: Can the Prime Minister explain why inward investment is falling in this country, but increasing in countries that are part of the eurozone?

Tony Blair: Issues to do with trade and investment will of course form part of the assessment, but we still get a very substantial amount of inward investment in this country, I am delighted to say.

Point of Order

Pete Wishart: On a point of order, Mr. Speaker. Yesterday, the Paymaster General made much of the fact that the amendments selected for debate in respect of the Finance Bill had been tabled by Opposition parties, but the impact of the programming has been such that the sheer number of clauses to be debated and the amount of amendments tabled by the Conservatives mean that we will have no opportunity this evening to discuss the amendments tabled by the Scottish National party. We will not, therefore, have an opportunity to discuss issues that are fundamental to the Scottish economy, such as oil and whisky revenue. What should we in the minority Opposition parties do to ensure that our amendments are debated? What can you do to ensure that minority parties' amendments are debated?

Mr. Speaker: Like other hon. Members, the hon. Gentleman is bound by the programme motion, which has been decided. Of course, the Finance Bill will also be dealt with in Committee, and it is up to him and his hon. Friends to seek opportunities to raise the matters about which he is so concerned.

Telecommunications Masts (Railways)

Patsy Calton: I beg to move,
	That leave be given to bring in a Bill to restrict the permitted development rights of railway or light railway undertakings in respect of telecommunications masts.
	The restriction would have the effect of requiring rail undertakings, including Network Rail, to seek full planning permission before erecting masts more than 15 m high, in common with other companies erecting masts. That would enable proper democratic scrutiny and give time for local people to engage in the process.
	The masts are required to relay data and voice communications. The work includes the installation of a new signalling system known as the train control system and will allow the introduction of automatic train protection—the highest level of rail safety available. Clearly, I do not argue with that, but I do argue that a failure to require full planning permission means that Network Rail can site masts of any height anywhere it likes on rail land, with consequent loss of public confidence and, indeed, public outrage when inappropriate siting leads to loss of visual amenity and loss in the value of homes.
	Network Rail currently engages in a notification process for masts higher than 15 m and, I understand, up to 33 m. The consultation that takes place is very limited; even precise locations are made available to the public only on application to the appropriate body—that is, if they can find out in the available time which body that is.
	In Cheadle, the first mast, at Ravenoak road in Cheadle Hulme, was notified to residents on 16 December 2002—not a good time for most families. At least one of the most affected families was missed out. The notification was headed "West Coast Modernisation, Notice of Forthcoming Works—Carr Wood Park".
	Carr Wood park is some half a mile away. It turns out that it had been the preferred location, as it is screened by trees. In fact, the mast has been put next to a railway bridge where the arrangement of housing is such that about 100 homes have a direct view of the 20 m height of the towering monstrosity. The worst-affected residents' home is 16 m from the base of the 20 m high mast, with no screening whatsoever. That is roughly 65 ft of mast—twice the height of an ordinary house. Network Rail could not have chosen a worse site.
	In another case in my constituency, at Smithy Green, the notification letters were delivered to households only after work had begun. It was a mistake, but that is in no sense consultation. Under the law as it stands, however, Network Rail does not have to notify residents at all, so mistakes do not count. I now understand that Network Rail has plans for 33 m high masts in national parks and open countryside, and plans to bring in more than 5,000 in total.
	I have been in communication with Network Rail, the local authority and the Department of Transport, and I have written to the Department for Environment, Food and Rural Affairs. A very unsatisfactory situation emerges. Network Rail claims that its permitted development rights when notifying the local planning authority come from part 11 of the Town and Country Planning (General Permitted Development) Order 1995. The Minister of State, Department of Transport, the right hon. Member for Warley (Mr. Spellar), indicated in a reply to me that part 17 of the order was the relevant part. A more recent letter from him said that either might be relevant. I quote:
	"Part 17 is used for some works, but part 11 is the more important for those relating to track, bridges and stations."
	My Bill would amend both parts 11 and 17 for the avoidance of doubt.
	Guidelines about masts and their erection published by the Department for Environment, Food and Rural Affairs make it clear that visual amenity is to be the major factor in determining the position of masts. When the right hon. Member for Greenwich and Woolwich (Mr. Raynsford) was a planning Minister at that Department, he said:
	"It is vital that the masts which enable the service to be delivered"—
	he was talking about other telecommunications companies—
	"are designed and sited sensitively so that their environmental impact is kept to a minimum and that local people have a better chance to have their say."
	I understand from the Department for Transport that those guidelines, which apply to every other mast company, do not apply to Network Rail. That is extraordinary—all the more so, given that the design of masts that are being erected makes the structure appropriate for additional operators. In addition, prior to its demise, Railtrack entered into contracts with various telecommunications companies to provide them with sites. Should Network Rail wish to provide sites for other operators, full planning permission will be necessary. However, the whole world knows that it would be almost impossible to say no once the mast has been there for some time.
	The Minister of State has been helpful in suggesting that local authorities can apply for
	"the removal of a particular permitted development right and require an application for planning permission by submitting to the Secretary of State an order under Article 4 of the General Permitted Development Order."
	However, my local authority in Stockport points out that Network Rail would contest that on a case-by-case basis and that the local authority would have to demonstrate why the location should be treated differently from elsewhere. The procedure would prove to be lengthy and expensive, and is expected to be used only in exceptional circumstances.
	My argument is that we have a loophole in the law that requires closing. The public deserve better than this, and at the very least should be enabled to see that their local elected representatives and the local planning authority can protect their amenity in the same way as is expected with all other telecommunications companies.
	Question put and agreed to.
	Bill ordered to be brought in by Mrs. Patsy Calton, Vera Baird, Norman Baker, Tom Brake, Mrs. Annette L. Brooke, Sue Doughty, Mr. Don Foster, Paul Holmes, Julie Morgan, Mr. Andrew Stunell, Ann Winterton and Mr. Crispin Blunt.

Telecommunications Masts (Railways)

Mrs. Calton accordingly presented a Bill to restrict the permitted development rights of railway or light railway undertakings in respect of telecommunications mast: And the same was read the First time; and ordered to be read a Second time on Friday 20 June, and to be printed [Bill 107]. Orders of the Day

Finance Bill

(Clauses Nos. 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules Nos. 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration).
	Considered in Committee [second day].
	[Sir Alan Haselhurst in the Chair]

Clause 130
	 — 
	Charge and Rates for 2003–04

Question proposed, That the clause stand part of the Bill.

Howard Flight: As hon. Members know, the clause simply sets the basic rates of income tax for this year at 10 per cent., 22 per cent. and 40 per cent. We have already pointed out that the Government appear to be confused by their tax system. They misquoted the basic rate at 20 per cent. in the explanatory notes, when automatic indexation increases in the tax bands of 2 per cent. accompany the rates. However, we wish to speak about the clause because of the failure to deal with personal allowances and inflation: yet another stealth tax especially hits lower and middle-income earners.
	When compared with our competitor countries, Britain has the lowest levels at which people start to pay tax. They will be even lower in real terms as a result of the fall in the real value of personal allowances, which have decreased from 60 per cent. of average income in 1950 to 24 per cent. today. Someone who earns only £15,000 a year—25 per cent. below average earnings—will pay tax of 22.5 per cent. of income as a result of combined income and national insurance tax liabilities of £3,388. If such an individual has, for example, two children, depending on the income of the spouse, whether they can complete the form and whether the Government can handle the administration, they may get back all or more in child tax credit and qualify for working tax credit.
	Why tax people on such modest incomes in the first place? Why do a Labour Government make the rate at which taxation starts even lower in real terms? It is difficult not to conclude that the Government's concealed objective is to make people feel dependent on them for their tax credits to offset the ridiculously low rates at which taxation starts.

John Redwood: Has my hon. Friend also noticed that in the Bill the rate for those earning a slightly higher income and above is 40 per cent.? However, we know that the Government want to levy tax at 41 per cent., which they are doing by a backdoor means of changing the rules on national insurance. Would not it be more honest to set the rate at 41 per cent. and thus accept that the Government have broken their promise to the British people not to raise income tax rates?

Howard Flight: I thank my right hon. Friend for his comments. The Government have already learned from the local election results that the British electorate are not stupid and that they know perfectly well that they now pay income tax at a rate of 41 per cent. if they qualify for higher rate taxes.
	The immediate effect of the stealth tax of freezing personal allowances will yield about £500 million per annum directly, but the knock-on effect will push more people into the higher tax rate. Data received in response to questions put by my hon. Friend the Member for Eddisbury (Mr. O'Brien) show that, according to the Government's own figures, there will be a 23 per cent. increase between 2002–03 and 2004–05 in the number of people with incomes over £34,515, rising from 3.9 million to 4.8 million. Not all those people will pay higher rate tax, because some will be pensioners, but that is nevertheless a good rough and ready measure of the extent to which the Government's income tax policies are pushing policemen, teachers, soldiers and nurses into higher rate tax brackets, as well as starting to tax them at a lower real income.
	We regard this stealth tax as particularly devious and wrong. The Conservatives wish to reform and simplify the tax system when we are elected at the next election, and to take large numbers of people out of paying tax on such ridiculously low incomes.

Norman Lamb: I entirely endorse the comments of the Conservative spokesman on the impact of freezing personal allowances. It is a stealth tax that will have a significant impact on low-paid people. We wish to debate this clause because it is clearly central to the Government's Budget strategy and to the choices that the Government make about taxation. I understand that, under the procedures of the House, we cannot table amendments to the rates, so I shall make our points by speaking on the clause.
	I want to start by reasserting the Liberal Democrats' belief in the principle of progressive taxation. After six years of a Labour Government, it seems extraordinary that the poorest 20 per cent. pay a higher proportion—41.7 per cent.—of their income in taxes, compared with the richest 20 per cent., who pay just 34.2 per cent. That is a regressive tax system, and we would like to see it adjusted.

George Osborne: Will the hon. Gentleman help me to understand his remarks by telling me what the rates and bands of the Liberal Democrats' local income tax would be?

Norman Lamb: We simply want to propose an entirely revenue-neutral system that would replace council tax—which I shall come to later—with a local income tax. If the hon. Gentleman wishes to support the council tax, which is having a dramatic effect on low-paid people and pensioners on fixed incomes, I would like to see him do so.
	One of the reasons that the rates in clause 130 remain the same as last year's rates is that the Government have orchestrated a £2 billion tax hike through the council tax. They have failed adequately to fund nationally agreed pay rises, pension increases, national insurance increases and new requirements on services imposed on local authorities. We support those requirements, but they have not been adequately funded. The result has been an average increase in council tax that is four times the rate of inflation. The impact of that on pensioners on fixed incomes is severe and cannot be supported. I would have thought that many Labour Members would see that such a regressive system needs to be reformed. The regressive nature of local taxation is even worse than that of national taxation. The poorest fifth of households pay 7.1 per cent. of their income in local taxes, compared with the richest fifth, who pay just 1.8 per cent.
	Income tax is self-evidently based on the ability to pay. The Liberal Democrats' preference for a 50p rate for income over £100,000, which is in line with much of Europe and the state of New York—there is hardly evidence there that it leads to a brain drain—and which I suspect is supported privately by many Labour Members, could initially provide funding to cut council tax by £100 per household this year and get rid of the iniquities of tuition fees and top-up fees, which act as such a disincentive to students on poor incomes.

Howard Flight: I thoroughly endorse the hon. Gentleman's comments on council tax. However, the US tax system has substantial allowances against income, including interest payments, so it is not entirely accurate to say that there is an effective 50 per cent. rate of income tax. The net effect on higher earners generally comes out at about 40 per cent.

Norman Lamb: I thank the hon. Gentleman for those comments; he may well be right. I am sure that he knows more about it than I do, so I am happy to accept his comments. None the less, the fact remains that the overall tax system in Britain is highly regressive and, with the impact of the increases in council tax, it is having a severe effect.

John Burnett: In years past, I have had opportunities to gauge the disparities or otherwise between the taxation levied by different states, so will my hon. Friend take it from me that the precedent in the United States, whether it be federal, state or city tax, is according to the ability to pay—an important principle that we should not forget?

Norman Lamb: Absolutely. That is in great distinction to the system that we have in Britain with a system of local taxes, which, self-evidently, is not based on ability to pay.

John Redwood: How does the hon. Gentleman work out that someone on a higher income paying 40 per cent. income tax on practically all his income and then paying lots of other taxes out of net income, is on an effective tax rate of 31 per cent? That sounds like Liberal Democrat arithmetic.

Norman Lamb: As I understand it, the figures have all been properly assessed and are based on parliamentary answers, so they have been accepted as factual.

John Bercow: The hon. Gentleman's attempted response to my right hon. Friend the Member for Wokingham (Mr. Redwood) will not suffice. Simply to say that the facts have been checked but that he cannot trouble us with them now is not good enough. What assessment has the hon. Gentleman made of the probable impact of the level of income tax at the higher rate and the increase in national insurance charges on the prospects of recruitment and retention in the police force, the teaching profession and the NHS?

Norman Lamb: I personally have not made any assessment. [Hon. Members: "Ah!"] Hon. Members express great surprise. I would say only that these higher rates of tax apply in many other countries and do not cause massive problems in terms of a brain drain or recruitment to public services. At the end of the day, we all have to decide how best and most equitably to raise our taxes, and the Liberal Democrats believe that the current system is not adequately progressive and we would prefer to move to a more progressive system.
	To return to the funding of students in further and higher education, about which the Conservative party has also raised concerns, although I am not sure about the funding of its proposals—

Roger Gale: Order. The Chair has been extremely tolerant of the debate so far, but we are now moving far away from income tax.

Norman Lamb: I am grateful for that. I was simply making the point that with the rate that we are proposing of 50 per cent., the Government could get rid of the iniquitous proposed system of funding of top-up fees and tuition fees for students.
	As I have said, many Labour Members would share our view that the tax system should be more progressive than it is. I suspect that the Minister, in her quieter, private moments may well agree. The Government are caught on the horns of a political commitment not to raise income tax, so tax is still raised but in ways that are more unfair than if it was raised by way of income tax, and which this year is hitting people on low pay and pensioners on fixed incomes very hard indeed by way of the council tax.

Richard Younger-Ross: Can my hon. Friend explain the impact that the present unjust system has on areas such as Devon where we have a large number of people on fixed incomes and a large number of pensioners and low-paid people who have been penalised by the council tax? Is he aware that all parties on joint administrations in Devon have agreed that the council tax system is wrong and that they want to see a fair taxation system, and that includes the Conservative leader of Devon county council, Christine Channon?

Roger Gale: Order. I remind hon. Members again that this is a debate about income tax levels, not council tax.

Norman Lamb: I am in some difficulty in responding to the intervention given your comment, Mr. Gale. I simply endorse what my hon. Friend says and say that in North Norfolk, with a low-wage economy, the position is much the same.

John Redwood: I declare my interests as they appear in the Register of Members' Interests.
	The clause sets out income tax rates, but it does not tell us the whole story about how incomes will be taxed. As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) pointed out, we must take clause 130 in conjunction with the meanness over the bands and the 1 per cent. surcharge on national insurance payable over the whole income range for the first time, which means an increase in the 40 per cent. tax rate in the Bill.
	I rise to speak against the clause because I represent a constituency where an income of £35,000 a year is not huge but necessary to meet the ordinary living expenses in such an area, given high house prices, high costs of services, high council and other local taxes and the general cost of living.
	The Government are making a great mistake in drawing so many hundreds of thousands of additional people into the tax net to pay the 41 per cent. tax—the combined income tax rate in the clause and the 1 per cent. national insurance surcharge. That will leave many people quite short of cash to meet their family bills over the year. People in Britain under the Conservative Government, and more recently under the Labour Government, have become used to experiencing rising take-home pay and rising spending power if they are in a reasonable job and keep that job. That is something that Members on both sides of the House usually welcome. The question that we have to ask today is whether the Government are now damaging that in a dangerous way. I believe that they are. They are reaching the point where higher taxes of a stealthy kind on people's incomes are now doing considerable damage.
	What should the Government do about it? They should be more honest about the fact that they are effectively increasing income tax and review again their public expenditures to see whether they can do a better job in controlling and containing waste and unnecessary expenditure so that they do not need to put through such large increases in the tax burden. I am sure that that advice will fall on deaf ears with the Minister, but it is heartfelt and well meant, and the Labour party will discover to its dismay in the ballot box during the months ahead that this is an extremely unpopular imposition, and that the combination of the rates, bands and the national insurance surcharge is correctly perceived outside as a substantial increase in the income tax burden. When the Government use their majority to push this through today, they will do something that they will live to regret.

George Osborne: I welcome you to the Chair, Mr. Gale.
	I congratulate my hon. Friend the Member for Arundel and South Downs (Mr. Flight) on ensuring that the clause is debated in the Chamber because this is a classic stealth tax that should be brought to the attention of the public. My hon. Friend has done that exceptionally well, as has my right hon. Friend the Member for Wokingham (Mr. Redwood). The charge that it is a stealth tax is not just a Conservative charge. If one reads the commentary after the Budget from the various accountancy firms, one is struck by the fact that almost every firm pointed to this stealth tax. Tax partners at accountancy firms, including Mr. Warburton, a senior tax partner at Grant Thornton, have said:
	"Because the increase on tax bands has been very modest, there has been a stealth rise . . . The rate bands are only going up by about 1.7 per cent, while earnings have gone up by about 3 or 4 per cent."
	Of course, that will have a serious effect on people and their incomes. Because the tax-free allowance for people under 65, which is normally increased in line with inflation, is staying at £4,615, KPMG, another accountancy firm, has estimated that it will cost the average taxpayer £95. Those are serious increases at a time when people are already facing increases in council tax, national insurance and so on.
	Grant Thornton has also said:
	"This is a classic case of fiscal drag. More people are drawn into the higher tax bracket and pay the top rate on a rising proportion of their income."
	We need to ask ourselves: what is the point of a higher tax rate if more and more people are drawn into it? The higher tax rate was originally designed for the people with the highest incomes in society but now, as my hon. Friend the Member for Arundel and South Downs pointed out, people in the education system, the health service and police service are paid far beyond that.
	I discovered from the "Today" programme this morning not only that my constituency has the highest income of any in the country—the highest in terms of purchasing power, that is—but that the average income in my constituency is around £30,000. A huge number of people will be paying the higher tax rate in that constituency—and there were many others on the list. Each year, the number increases. This year, as a result of the clause, it will increase by 150,000 people.
	It is incumbent on the Committee to ask the Minister to be honest about this matter. If the Government want to increase income tax, why do they not put it in their manifesto, come to the House with a Budget and do it? Instead, each year, we get this salami-slicing stealth tax, which is eroding people's disposable income.

Jonathan Djanogly: Having heard my right hon. and hon. Friends speak in the debate, it seems to me that income tax rates are becoming increasingly irrelevant to the concept of take-home pay. The Government have thrown the majority of people into the dependency culture. The use of tax credits has in effect rubbished the concept of tax rates in relation to take-home pay.
	I had an example of that only a few weeks ago. One of my constituents, a local employer, explained to me how he had two members of staff both earning roughly the same amount of money. However, one of them was getting a lot more through the use of tax credits. He said that that destabilised the wage environment in his company because people compared take-home pay. He resented the fact that he was being used to monitor income tax and in effect to act as a benefits agency on behalf of the Government. That is why I say that overall rates are becoming increasingly irrelevant.
	The same argument applies to national insurance, which now has little to do with the old stamp concept. It has simply become another way to raise income tax, with the added benefit of squeezing a bit more out of companies. Some have called it a stealth tax but I see nothing stealthy in the way most people's pay packets were hit last month. There will not be much stealth there. However, the stealthy part is the way in which comparative take-home pay is being hit in a secret way. People cannot tell what is going on.
	This Government said that they would not increase income tax and I believe that they are still saying it. In practice, they are deceiving the British people as to what is going on.

Howard Flight: My hon. Friend makes an extremely important point. Does he not think that, if we have a society where people do not know what their tax rates are, and where what they receive in their pay packet bears no relationship to the job that they are doing, it is a huge demotivation to increase their skills and productivity and to take the whole economy forward?

Jonathan Djanogly: I thank my hon. Friend for making that important point. This area needs a lot more study, because there are many implications from mixing the dependency culture with income tax and with corporation tax. Companies are viewing the three together. There is a new mind-set coming into play that, whichever way I look at it, works to the negative. I agree with my hon. Friend's point.

John Bercow: My anxiety is that the Government are plundering the pockets of the people but, to put it mildly, it is not at all clear to the people that they are getting a fair return for that which is levied upon them. I say in all candour to the Paymaster General that she has a responsibility to abandon the insider mentality that is increasingly characterising both the decision making and defensive pronouncements of Ministers.
	It is natural that Ministers will think, "Let us just increase tax a bit. It will not cause appreciable harm. People may not notice. We seem to have been able effectively to con them thus far and it may boost our finances somewhat." My warning to the hon. Lady is that the legendary patience and stoicism of the British people when confronted with additional imposts could soon be wearing thin, if it has not already done so. I invite her to reflect on a number of considerations.

George Osborne: My hon. Friend talks of the legendary patience of the British people. However, I have noticed that they are growing very impatient with the council tax increases. Of course, with the fuel tax increases, their patience broke and there was a tax strike.

John Bercow: One of my hon. Friend's great qualities is his prescience and it has not failed him on this occasion, for he has precisely anticipated my thought process. The reaction to the incidence of exorbitant council taxes could soon be mirrored in a public reaction to the incidence of exorbitant direct taxation flowing from the Treasury and the Inland Revenue.
	The hon. Lady has a responsibility to reflect on a number of considerations. First, at what point does the incidence of higher taxation both on individuals and on the corporate sector threaten to undermine individual incentive and competitive industrial performance? If we have not reached that point, we must be very near to it. In the light of the Chancellor's downgraded forecasts for the performance of the economy in the years to come, it would be sensible for her and her colleagues to take stock of the consequences of that burdensome taxation. That is the more powerful a consideration in the light of the fact—which no amount of Treasury casuistry can gainsay—that over the past six years we have sacrificed two thirds of the competitive tax advantage that we have enjoyed relative to other member states of the European Union.
	The second consideration on which the hon. Lady should reflect seriously and which she should discuss with her colleagues is the likely incidence, to which I referred in my intervention on the hon. Member for North Norfolk (Norman Lamb), of higher tax rates, fiscal drag and national insurance contributions on people working in key posts in the public sector. One cannot continually clobber those upon whom we critically depend for the effective discharge of public services without there being an impact on recruitment and retention. In the words of the late Enoch Powell, that point is so blindingly obvious that only an extraordinarily clever person could fail to see it.

Jonathan Djanogly: Take-home pay has fallen for the first time in over a decade this year and that is not to be forgotten, but in relation to the public sector my hon. Friend will be aware that this is the first time in the history of this country that benefits-included average take-home pay in the public sector is higher than in the private sector. That says little for our productivity.

John Bercow: That is indeed a bad sign, and a worrying portent of the likely development of the two economies of the private and public sectors in the months and years to come.

George Osborne: Will my hon. Friend give way?

John Bercow: I will give way once more, but as you will readily discern, Mr. Gale, I am itching to make my third point. Whether the Committee is itching to hear it is of course another matter.

George Osborne: Has my hon. Friend made any calculation of the amount of churning that will result from the clause? The state will be paying those who work in the public sector, who will then pay it back with tax. My hon. Friend may not be able to answer my question, but perhaps the Paymaster General will.

John Bercow: I am grateful to my hon. Friend for the deft shoe-shuffle with which he ended his intervention. He is absolutely right. If I were a Minister, I would feel it incumbent on me to provide the answer. I am not, so it is not; but it is the Paymaster General's responsibility to give a satisfactory reply. What merit is there in an arrangement whereby the middle man takes the money and gives it back again, with all the bureaucracy that such a process entails? It would have been sensible to take account of those considerations in policy formulation at the outset.
	My third point is very simple. It is easy for Governments to think—as my party did when in office—in terms of sums raised and inputs made, while focusing far too little on outputs. I have noticed, not just in the Paymaster General's words but in those of her right hon. and hon. Friends, an increasing tendency to stick to the brief and to assume that the House and, more important, the country can be fobbed off with a continuing regurgitation of statistics relating to what is being raised and spent.
	That is understandable, but misguided. Let me say in all sincerity that, ultimately, the public are not much interested in hearing from any of us about inputs. They are interested in outputs, and if the words that they hear from Ministers about the level of inputs do not resonate with them because they are not reflected in local service delivery, they will come to regard Ministers' pronouncements first with cynicism and then with contempt.
	The fact that the Government are spending £50 million an hour makes it incumbent on Ministers to demonstrate that improved services on a substantial scale are resulting from that level of expenditure of the public's money. The effect of the higher taxes is very real and painful for those—often on modest incomes—who must pay them, while the effect of the Government's increased expenditure, often poorly distributed and untargeted, is much less beneficial. The pain is clear, but the gain is frequently either insubstantial or non-existent.

John Redwood: Will my hon. Friend give way?

John Bercow: How can I resist my right hon. Friend's entreaties?

John Redwood: Does my hon. Friend think that the ministerial reluctance to speak from the heart rather than sticking to the brief is connected with the fact that Ministers are benefiting greatly from the increased taxes? We see that in the ministerial travel bill, the ministerial drinks bill, the ministerial entertainments bill, the ministerial aides bill and the ministerial press support bill. I think that that is where a lot of the money is going, which may explain why Ministers are not prepared to say much here. They know that they are robbing the British people for no good reason.

John Bercow: My right hon. Friend is usually right, and he is right on this occasion. I believe that money raised from the taxpayer should be used for the taxpayer's benefit. I bear the Paymaster General—who trounced me in Bristol, South in 1992, but with whom I have enjoyed cordial relations ever since—no personal ill will, as she knows; but I do not want her, or her colleagues, to benefit at the centre from increased imposts on the public. I want the British people to benefit, and above all I want my Buckingham constituents to benefit. They are not currently doing so. They are getting restless; they are increasingly angry; they are about to vent their spleen on the Government, and their reaction will be mirrored nationwide. 1.15 pm

Dawn Primarolo: I am grateful to the right hon. Member for Wokingham (Mr. Redwood) and the hon. Member for Buckingham (Mr. Bercow) for giving me the benefit of their views and advice. Both made it clear that it was for political parties and individual Members of Parliament to decide on the policies that they advance, and to take responsibility for them.
	I was greatly encouraged by the reference of the hon. Member for Buckingham to the 1992 general election campaign in Bristol, South, when he was my very able Conservative opponent. On that occasion he put to the people of Bristol, South the views that he and the right hon. Member for Wokingham have advanced today. He is right: the voice of the people of Bristol, South was pretty substantial. There was an 8.5 per cent. swing to Labour. While I greatly enjoyed the campaign, I am sure that the hon. Gentleman is more safely tucked up in Buckingham now than he would ever have been in Bristol, South.

George Osborne: Will the Paymaster General give way?

Dawn Primarolo: I am happy to, but I am sure that you would like me to speak about clause 130, Mr. Gale. I was being polite to Members.

George Osborne: Will the Paymaster General reflect on the fact that the difference between the 1992 election and subsequent general elections is that in 1992 the Labour party told the public in advance that it would increase taxes and they rejected it, whereas in 1997 and 2001 it did not tell them and then proceeded to increase taxes?

Dawn Primarolo: The huge difference between the election in 1992 in Bristol, South, as in the country—

Roger Gale: Order. This is an interesting exchange, but it is totally irrelevant to the clause.

Dawn Primarolo: I was enjoying myself, Mr. Gale, as no doubt were Opposition Members, but you are right to return me to clause 130.
	The clause imposes income tax for 2003–04. The starting rate of 10p that we introduced in 1999 means that around 3 million lower earners continue to pay about half the marginal tax rates that they would otherwise pay. We have kept our promise not to increase the basic or top rates of tax, which remain at 22p and 40p.

Norman Lamb: Will the Paymaster General give way?

Dawn Primarolo: Will the hon. Gentleman allow me to make a little more progress? I want to reply to a couple of points that he made. The right hon. Member for Wokingham was right—the figures do not add up—and I should like, in a spirit of friendship and generosity, to explain why that is. I shall be happy to give way to the hon. Gentleman later.
	At 22p, the basic rate is at its lowest for 70 years. As Opposition Members said, the tax rates are complemented by measures designed to make work pay and to eliminate poverty. With effect from April, the Government have introduced child tax credit and working tax credit. Those new credits represent the biggest-ever investment in families, with some £13 billion to be spent on child tax credit alone. Child tax credit is paid not through the wage packet, but directly to the main carer, normally the mother.
	As the hon. Member for Buckingham said, the income tax rates are also part of our commitment not just to macro-economic stability but to sound public finances. That applies particularly to policies enabling us to make a sustained investment in public services. Prudent management of the economy has allowed us to increase public services without raising income tax rates.
	We have already outlined our ambitious plans to increase investment in the national health service, matched by reform, by 7.2 per cent. a year after inflation for the next five years. That will be financed by the increased national insurance contributions to which the hon. Gentleman referred, which is entirely in line with the Beveridge tradition.

John Bercow: Will the right hon. Lady give way?

Dawn Primarolo: Before the hon. Gentleman asks me to give an example, I shall give it now and then give way to him. Compared with 1997, by 2008 there will be 66,500 more nurses, 20,000 more doctors, 44,000 new therapists and about 100 new hospitals. To return to the example of Bristol, South, the difference between 1992 and now is that unemployment is down from some 15 to 17 per cent. to under 3 per cent.; people can also see real improvements in a health service that was so badly starved of money for such a long time.

Howard Flight: rose—

Dawn Primarolo: I did say that I would give way to the hon. Member for Buckingham.

John Bercow: I am extraordinarily grateful to the Paymaster General. I shall be candid: I had hoped to tip her into the proverbial pit, but for her to do that herself before I had the chance to do so is generosity on a truly grand scale. Does she not realise that what she has done is to commit precisely the sin—regurgitating statistics about inputs—of which I was accusing her a few moments ago? Why does she not answer the very straightforward and practical question that the Chief Secretary has twice refused to answer in the past four weeks: why does the increase in clinical activity in the national health service represent only a tiny fraction of the increase in expenditure on it?

Dawn Primarolo: Without wishing to try your patience, Mr. Gale, by entering into a discussion on the national health service, I should point out that the hon. Gentleman well knows that given the resources put into the NHS to date, there has been a significant increase in activity. I will not try your patience by listing them all now—

John Bercow: Oh go on.

Dawn Primarolo: No, I shall stay in order despite the hon. Gentleman's invitation. Through the increase in national insurance over the next five years, there will be substantial continuing investment in the NHS.

John Baron: Will the Paymaster General give way?

Dawn Primarolo: I am happy to give way to the hon. Gentleman, but I should point out that clause 130 is only about the actual rates of tax. I shall let him make his point, and then I shall return to being in order.

John Baron: I thank the Paymaster General for giving way—I shall be brief. How can she square her comments about the NHS with Government statistics that clearly show that during the past three years, expenditure on it has risen by £9 billion—an increase of approximately 24 per cent.—yet hospital treatments have risen by only 1.5 per cent. and hospital admissions have actually fallen by 0.5 per cent.?

Roger Gale: Order. I will allow the right hon. Lady to respond, but I should be grateful if the Committee would return fairly swiftly to tax rates.

Dawn Primarolo: I will do exactly as you ask, Mr. Gale. Of course, as the hon. Gentleman knows, when the national health service has been starved of resources and does not have enough beds, doctors, nurses, therapists and other support workers, it takes time to put those people in place to provide treatment. We are now reaching a critical point, whereby such staff are in place and the NHS is going from strength to strength.
	I turn to the specific issues raised by hon. Members. The hon. Member for Arundel and South Downs (Mr. Flight) referred to the indexation of personal allowances. The freezing of them came into effect in April 2003, and cost the basic rate taxpayer 36p a week. As I said, that will help to fund annual real growth in national health service spending—something that the electorate desperately wanted and supported when this Government announced it; and of course, most pensioners over 65 are protected. Those aged 65 to 74 benefit from above-inflation increases in personal allowances, as do the over-75s. The Conservatives repeatedly froze income tax allowances when in power, but they did not use the money to invest in public services; they used it to pay for their economic failure.

Norman Lamb: None the less, the freezing of personal allowances is a tax increase on low-paid workers. Will the Paymaster General give a commitment that it will not be repeated during this Parliament?

Dawn Primarolo: If the hon. Gentleman will allow me, I shall first respond to a few more of the points that I need to deal with. I will deal later with his completely incorrect assertion about the position of the lowest 20 per cent. of earners vis-à-vis tax, as he is indeed very wrong.
	The hon. Member for Arundel and South Downs and other Conservative Members referred to the increased number of higher rate taxpayers. To use again the example of Bristol, South, one excellent thing for the constituents whom I represent is that they now have jobs and can contribute to public services through national insurance and the tax system—something that the very high level of unemployment under the previous Administration denied them. We have increased the basic rate limit by inflation to maintain its value. As I said, that is in contrast with the previous Government, who froze the basic rate limit.
	I would have expected Conservative Members to applaud the increase in the number of taxpayers, because it is a sign of a healthy economy—of more people getting into work and getting paid more. For the period 1997–98 to 2002–03, mean male average earnings increased by 25 per cent., and average full-time earnings for men and women increased by 26 per cent. Full-time earnings for the top 10 per cent. of men and women increased by 27 per cent., but prices went up by 13 per cent. Employment has increased by nearly 1.5 million since the spring of 1997. The number of people in work is at record levels—something that the previous Administration never achieved.
	The right hon. Member for Wokingham and some of his colleagues referred to the use of national insurance. The reason why they keep on referring to the increase as a stealth tax escapes me. We announced that we would increase national insurance by 1 per cent., and we said that all the money would be spent on the national health service, which it is. If Conservative Members are saying that they would cancel that rise as well making, according to the hon. Member for Arundel and South Downs, a 20 per cent. cut across the whole public expenditure sector, they need to concentrate not on what this Government are doing but on how to explain to the electorate that there would be fewer teachers, fewer nurses and fewer doctors.

Howard Flight: rose—

John Baron: Will the right hon. Lady give way?

Dawn Primarolo: As I have just referred to the hon. Member for Arundel and South Downs, I should give way to him; that would be the polite thing to do.

Howard Flight: I thank the Paymaster General for giving way. She said that all of the 1 per cent. national insurance charge is being devoted to health service expenditure, but I distinctly recollect that approximately half is for the health service, with half going towards tax credits. Would she care to comment on that? Secondly, I repeat that she should not indulge in what she knows to be Labour party misrepresentations. She should instead be concerned by, and take note of, factors such as the 50 per cent. increase in the cost of the central civil service, whose numbers are rising from 450,000 to 529,000. She should also consider ways in which Government expenditure on unnecessary bureaucratic costs might be reduced. That is what I was talking about, rather than Government spending overall.

Dawn Primarolo: All of the 1 per cent. national insurance rise is devoted to the national health service. If the hon. Gentleman refers to last year's national insurance legislation, which provided for that, he will discover that I said that repeatedly and that it is on the record. Indeed, the figures demonstrate that fact; the rise is not being used for anything else.

John Bercow: Will the right hon. Lady give way?

Dawn Primarolo: If I may, I shall deal with the second point made by the hon. Member for Arundel and South Downs. I can only go on the newspaper reports about, and the direct quotes from, the hon. Gentleman himself and the right hon. Gentleman the Leader of the Opposition. If I were to engage in propaganda devised by the Labour party, I would opt for something more spectacular—but I do not need to, as I can merely report the words that have come from the hon. Gentleman's mouth.
	I shall now deal with the points raised by the hon. Member for North Norfolk (Norman Lamb). He asserted—[Interruption.] I shall answer the hon. Member for North Norfolk, who has waited patiently; I may give way to the hon. Member for Buckingham later.
	The hon. Member for North Norfolk asserted that the poorest 20 per cent. of households pay 40 per cent. of their annual income in tax. He bases that assertion on a publication from the Office for National Statistics, "Effects of Tax and Benefits on Household Income". However, the hon. Gentleman wants to forget—conveniently—some crucial and substantial facts that did not appear in that publication. The first is that the latest figures for 2001–02—the figures used by the hon. Gentleman—do not include any measures that the Government have introduced to help low-income households, which came into effect from April 2002.
	Some of the excluded measures are the working tax credit, the child tax credit and the baby tax credit, the above-inflation increases in the basic state pension in April 2002 and 2003, and the increase in the minimum income guarantee for pensioners to match the increase in earnings. The article does not take into account the working families tax credit, which, following OECD guidelines, would reduce income tax payments for those in receipt of the benefit. Taking all the measures announced between 1997–98 and 2001–02, independent research by the Institute for Fiscal Studies shows that households in the bottom two quintiles have experienced the greatest proportion of real income gains over the five-year period.
	What of the assertions of the hon. Member for North Norfolk about council tax and the proposal that a 50 per cent. rate for those earning £100,000 or more will somehow pay for a £100 reduction of council tax—and just about everything else that the Liberal Democrats want to fund? It is interesting to recall that the Liberal Democrats wanted to increase public spending last year, but this year they want to cut council taxes. It seems that they want to fund whatever is fashionable. However, the hon. Gentleman's figures are wrong. The 50 per cent. rate on £100,000 would raise—the Treasury confirmed, when asked—an income of about £4.5 billion. That is the net take when the whole United Kingdom—England, Wales, Scotland and Northern Ireland—is costed. However, when the £100 deduction on council tax is calculated, the Liberal Democrat figure applies only to England.
	As the hon. Member for Buckingham said, it is difficult to take people seriously when their figures do not add up. It is also difficult to take them seriously when it is clear that they read the papers every day to find out what might be in vogue and then shape their policies around it. As confirmed by the hon. Member for Truro and St. Austell (Matthew Taylor), who speaks as the Liberal Democrat shadow Chancellor, the Liberal Democrats now believe that the Government are making the correct and necessary investment in public services. The direct tax burden on a single-earner family on average earnings and with two children will be 20.1 per cent., which is lower than in 1998 or any previous year since 1997, so it is irritating to hear the hon. Member for North Norfolk and his party asserting that such people are paying more tax. That does not sit well with the facts.

Norman Lamb: Does the Paymaster General have any concerns about the impact of this year's council tax increases—four times the rate of inflation—on low paid and pensioner households this year?

Dawn Primarolo: Of course I have concerns about impacts on lower income households. I shall not try your patience by listing the figures, Mr. Gale, but the Government were generous with the local government settlement on council tax this year. However, many Liberal Democrat authorities chose to increase local taxes on a large scale, so for the hon. Gentleman to stand in his place and claim that his party is concerned—when his councillors are not—is simply not a coherent position. I know that the Liberal Democrats like to be all things to all men and women—even depending on which ward, let alone which city, people live in—but when they are in the House, they should be more consistent in their suggestions. For the party that massively raised council taxes to suggest that it is now someone else's fault is not fair, correct, or accurate. I hope that the hon. Gentleman will not persist.
	Clause 130 is a modest clause and I have explained the effect on tax rates in detail. I have answered the many and varied questions put to me at the Dispatch Box. Before I sit down, may I say that for the rest of the proceedings I shall confine myself to the clauses—and not with questions unconnected with them—if that is how you would like me to proceed, Mr. Gale? I commend the clause to the House.
	Question put and agreed to.
	Clause 130 ordered to stand part of the Bill.

Clause 131
	 — 
	Indexed Rate Bands for 2003–04: PAYE Deductions Etc

Question proposed, That the clause stand part of the Bill.

Howard Flight: The clause extends by one month the date on which statutory inflation-linked changes to income tax bands must be made to PAYE deductions. It changes from May to the first pay day after 14 June. Essentially, it short-changes taxpayers by £10 as a result of the Chancellor introducing the Budget later than usual. People have received no apology. They will get the money back: in a sense, it is a £20 million interest-free loan from taxpayers to the Government.
	Such disregard of ordinary people is objectionable. Why cannot the Government get their act together? They were able to charge increased national insurance contributions with effect from May, but here they are messing about with ordinary people, who were expecting to see income tax band adjustments in their May salary. It may be a small matter, but it represents the arrogance of the Government, who could not care less about short-changing people a pound or two here or there.

John Redwood: I support my hon. Friend, who has summed up the main point extremely well. The Government's action is arrogant, thoughtless and unhelpful to employers, who are under pressure to explain it to their employees. There is no need for an interest-free loan from taxpayers to the Government, given that they are proposing to raise vast amounts of taxation through the Bill and from existing legislation. I hope that the Paymaster General will apologise to the British people for the incompetence of her boss, the Chancellor of the Exchequer. He may well have been preoccupied with his rows with the Prime Minister about the euro, but he has not even offered a statement to the House on that matter. As a result, we have had a delayed and bodged Budget, and we now have a forced loan from the British people to the Treasury. We deserve an apology.

Norman Lamb: I endorse the views of the Conservative spokesman on the matter. Is it not possible, as the Treasury Select Committee recommended in its report on the pre-Budget report last autumn, for much more notice to be given of the date of the Budget? It should take place in time to ensure that proper arrangements can be made for the new tax year. The problem that we are seeing here should never be allowed to happen.

Dawn Primarolo: The first day after 17 May has been the day on which employers and pension providers are asked to implement any codes and tax changes resulting from changes in the Budget. As last year, this clause changes the date, for this year only, from the first pay day after 17 May to the first pay day after 14 June. That allows time for the Inland Revenue to send out the necessary employer packs, and for employers to implement them, given that the Budget was in April this year.
	As PAYE works on a cumulative basis, no one will lose out as a result of the delay. The system automatically gives people the benefit of any tax reduction that they are due on the first pay day after 14 June. The clause makes no difference to the way in which the Inland Revenue and employers administer PAYE. It is essentially a technical amendment, to bring matters into line. As the hon. Member for Arundel and South Downs well knows, the same clause was brought forward last year in a straightforward and reasonable way and he saw no problems with it.
	Question put and agreed to.
	Clause 131 ordered to stand part of the Bill.
	Clauses 132 to 134 ordered to stand part of the Bill.

Clause 135
	 — 
	Provision of Services Through Intermediary

Stephen O'Brien: I beg to move amendment No. 8.
	I welcome you to the Chair, Mr. Gale, on what is the first occasion on which I have served under your chairmanship on the Floor of the House.
	Clause 135 extends the scope of the much reviled and criticised IR35 legislation, which continues to cause distress. It applies to people who provide personal services through an intermediary to those who are engaged in a domestic capacity. The proposals are to take effect retrospectively, from 10 April this year.
	The clause means that affected people will have to submit two self-assessment tax returns. The amendment is very simple and offers an easy solution. I am surprised that the Government did not adopt a similar approach in the first place. I hope that, for once, they will accept the amendment with the result that we get a better Bill. The amendment would simply delay the effective date for the income tax change, so that changes to national insurance and income tax happen on the same date.
	The Government's anti-avoidance legislation is drafted in such a way that the people concerned, to reflect their tax affairs properly, must make two self-assessment tax returns this year. Those individuals were encouraged to incorporate by the Government, but they will be left with the increased burden of corporate regulation, no tax incentives, and considerable complexity when it comes to self-assessing their tax affairs.
	It would be sensible to remind the House that the IR35 rules were originally written specifically to exclude domestic staff, presumably because the amounts at stake in tax and national insurance charges were not high. Has that changed dramatically over the past year? Is that why the Government are so monumentally concerned about the matter that they have to capture the domestic staff involved? Given that the clause is expected to raise only £15 million a year, that would be very surprising.
	Furthermore, although a huge—for them—additional regulatory burden is being placed on the people concerned, no regulatory impact assessment is available. Has one been undertaken? The Government claimed always to be able to put in place such an assessment. When the matter has been raised in various Committee discussions, the Government have responded by saying that they would sort out such an assessment—they never volunteer to provide one. Frankly, it is not good enough for the Government not to provide such an assessment, given that some people are patently being given an additional regulatory burden. The people involved are those least in a position to be able to bear such a burden. I call on the Government to issue a regulatory impact assessment in relation to this provision. I think that they would find it pretty poor reading, and that it would be sensible for them to accept the amendment.
	To make matters worse, the Government last year encouraged sole traders to incorporate, with the introduction of lower corporation taxes for smaller companies. A number of people acted on that, and incorporated—well done them—but now, only a year later, this Bill proposes to tax certain of those individuals as though they had not incorporated at all.
	The provision is not targeted at wealthy tax planners. It will affect workers on relatively low incomes, who pay tax at the basic rate. They relied on last year's legislation in good faith. The Chancellor's proposed IR35 changes will be a major headache for tens of thousands of people who provide domestic services, such as gardeners, cleaners and cooks. They will be dragged into the Government's bureaucratic tax trap. The people affected will lose money, and be forced to submit extra tax returns.
	The Chancellor is taking almost £50 million over the next three years out of the pockets of nannies, gardeners and cooks, and transferring it to the Government's coffers. The Federation of Small Businesses has noted that the provision will affect some of the lowest earners in Britain.
	Only last year, many of the people involved were encouraged by the Government to incorporate. Twelve months on, they are to be hit by this regulation. None of the expected tax incentives can continue to apply and, for the people involved, assessing their tax position will be a considerably complex task. The problem has arisen solely because of the Government's incompetence, and their inability to draft effective legislation. Many people who thought that they were doing the right thing by following the Government's advice last year will now be seriously inconvenienced and financially penalised for their diligence.
	No doubt, the Government will try to justify this clause only 12 months after they incorporated the very encouragement that has led to what they regard as the mischief of anti-avoidance. The Government say that they must stop anti-avoidance, and the Opposition have said repeatedly—as we must, to prevent the Government from falling into the temptation of mounting a false argument—that we support that. I have demonstrated the scale of the matter, but the theme of this Finance Bill, as was shown yesterday, is that the Government are determined to wrestle as many of the measures as possible through the House under the cloak of anti-avoidance. That is a blatant attempt to stifle scrutiny and criticism.
	The Government and the Treasury have adopted an arrogant approach. They are not aiming to target anti-avoidance so much as making a futile attempt to be anti-accountability. Britain's honest and hard-working citizens will not be fooled.
	I have read the official record of last year's Finance Bill Committee debates. The Government were fully aware that the interaction of lower corporation tax rates and dividend planning would provide tax advantages for an incorporated business. Even so, they implemented the measures without amendment.
	It is proper and right to remind the Committee and the Paymaster General—I also hope that the Chancellor may deign occasionally to listen to arguments that do not accord entirely with his own—about a Federation of Small Businesses report published on 3 February this year. The report said that, at the time that the Government proposed the measures last year, a self-employed person with profits of £15,000 could pay up to 32 times more in tax than an incorporated counterpart.
	The report, entitled "The Self Employed versus Incorporated Businesses", is well worth a read. It quotes figures from the Institute of Fiscal Studies, so it is not merely self-serving special pleading on the part of small businesses, although there is no more worthy cause in the business arena. The report states that, on profits of £15,000, the self-employed person would pay a combined income tax and national insurance bill of £2,884, which is 32 times more than the £91 paid in corporation tax by a limited company. On profits of £30,000, a self-employed person pays a combined income tax and NIC bill of £7,234, compared to £3,654 in corporation tax for a limited company. Is that not an obvious disparity between self-employment and incorporation?
	As a background to the amendment and to the Government's purpose in extending the measure to low-income earners, such disparity in tax treatment shows that, even after all the strong encouragement and the legislative power devoted to persuading those on low incomes to incorporate, the minute that, in good faith, they do so, they are slapped with a further regulatory burden. Their affairs become complex and they may suffer financial penalties.
	The remarks of Neil Hamper, the head of the Federation of Small Businesses taxation unit, are striking. He said:
	"Clause 135 is evidence of the hole which the Chancellor has dug for himself. It comes as little surprise that many self-employed people, some of the lowest-paid people in the UK, will choose to incorporate when the tax system so obviously discriminates against them."
	It is right that our scrutiny of the measure should be carried out by a Committee of the whole House. Our amendment would at least ensure synchronisation so that the regulatory burden was eliminated. The Treasury could easily accept our proposals, but one fears that, due to the Government's characteristic arrogance and their resistance to admit that they might have got something even slightly wrong, they are so stubborn that they will even resist something as sensible as our amendment, although I hope that the opposite will be the case.
	Through the Government's mistakes, the original legislation was not drafted properly, so they have a responsibility to those who relied on it. The least that they can do is to implement the measure in such a way that individuals can unwind their affairs or carry out self-assessment with the least complication.
	If the Government are characteristically blind to our arguments, I and my party, on behalf of the relatively low-earning nannies, gardeners, cooks and all the others who are affected by the measure will wish to press the amendment to a vote.

Several hon. Members: rose—

Roger Gale: Order. The hon. Member for Eddisbury (Mr. O'Brien) took a fairly wide-ranging approach in introducing his amendment. It may be helpful if I indicate now that I shall be unlikely to accept a stand part debate as well.

Norman Lamb: We very much support the amendment. We, too, share concern about the absence of a regulatory impact assessment. Often, such assessments do not comply with the Government's guidelines as to what they should include, but the fact that there is to be no assessment at all is of serious concern. The measure will add to the regulatory burden of people who are trying to operate small businesses, so there should be an assessment and I should be grateful if the Paymaster General would respond to that concern.
	I also share the concerns expressed by the Conservative spokesman, the hon. Member for Eddisbury (Mr. O'Brien), about the disparity in the tax treatment of sole traders and of limited companies. I shall not go into that in detail, in acknowledgement of your comments, Mr. Gale, but serious concerns have been raised with me and many others by the Federation of Small Businesses. People have been encouraged to incorporate and now this change has happened.
	Last year, when IR35 came in, the Liberal Democrats opposed the measure. We fully accepted the importance of tackling abuse and tax avoidance, but we thought that the Government were taking a sledgehammer to crack a nut and that the implications of the measure could be extremely serious. We are now discussing an extension of IR35, and I have some questions for the Paymaster General.
	What evidence can the Government show that the scale of abuse makes the measure necessary, given the relatively small amount of extra revenue that it will bring in? Why was it thought necessary to extend IR35? Why was the matter not dealt with last year when the first measure was introduced? I was going to ask what assessment had been made of the amount of extra income that would result, but a figure was mentioned by the Conservative spokesman. What is the overall purpose of the reform?

John Redwood: The clause is disappointing. I welcomed the Government's proposals last year to favour incorporated businesses and to introduce a better tax regime for the smallest companies. It was a sensible measure in favour of enterprise, so it is particularly disappointing that, after only a year, when, as one could have forecast, the policy has enjoyed modest success, the Government want to clobber those who took advantage of it and to reverse the position. I urge the Paymaster General to think again. Her thoughts last year were rather better than her thoughts this year.
	In support of my case, the Paymaster General has evidence that IR35 is not only a widely hated tax but also that it is extremely damaging to the United Kingdom. It pushed people out of self-employment. It sent some of them abroad, where they had successful, high-earning businesses; but others simply left that employment altogether, because the tax was an imposition too far. It did considerable damage at a time when the high-tech industries, which were especially targeted by the measure, were extremely fragile.
	My hon. Friend the Member for Eddisbury (Mr. O'Brien), in moving his amendment, pointed out the big imbalance between the taxation on earnings for a self-employed person and the taxation on profits for a small, incorporated business. He is right about that. However, a fair comparison for the Paymaster General to make, when she assesses the potential damage, as she sees it, to the Revenue, would be not between profits held within an incorporated business and the earnings of a self-employed person but between distributed profits in a small business and earnings. In such a case, the comparison is not as stark as my hon. Friend said, because there would be taxation on the money being drawn out as wages by the person concerned, or even as share dividend. If the person was the shareholder and decided to take money out, there would be a tax payment, which would narrow the gap, so the threat to the Revenue would not be as great as the Paymaster General will undoubtedly want us to believe when she replies to the debate. In normal circumstances, the gap for low-earning, self-employed people would not be nearly as great in terms of tax, as they would want to take all or most of the money out of the incorporated business in one form or another because they would want it to live on. As my hon. Friend pointed out, those people often do not earn much.
	Having listened carefully to my hon. Friend, I think that he was very gentle towards the Government, given the magnitude of their U-turn, in their decision to bash the very people whom they encouraged a year ago. His suggested remedy is mild. If he wishes to push the amendment to a vote, I shall have no worries about supporting it because it is better than the current provision.
	However, it would be better still if the Government dropped the clause altogether. The clause is nasty and brutish; it is part of rip-off, insensitive government. It will not bring in much revenue—the Treasury figures probably exaggerate the amount—but it will do damage and put many small entrepreneurs, people who are trying to provide a service, under a lot of pressure that they do not deserve. Such people are not experts on the tax system; they do not want to go through these enormously expensive and difficult changes. The measure will worry them, when they want only to provide a livelihood for their families and a service for someone else. I hope that the Paymaster General will realise that, in the main, they are decent people, trying to make a modest living while paying sensible amounts of tax. Her decision to target them will not be welcome in any constituency.

John Baron: May I welcome you to the Chair, Mr. Gale?
	I support the amendment. There is little doubt that clause 135 creates a gross injustice, a point that has been raised by several of my constituents. Last year, the Government encouraged sole traders and the self-employed to incorporate by introducing lower corporation tax rates for small companies. Subsequently, a large number of people did just that. Only a year later, on the grounds of reducing tax avoidance, the Government propose legislation that will tax individuals as though they had not been incorporated at all. Those measures are not targeted at wealthy tax planners; they affect many low-paid workers, who were fooled by the Government into incorporating and, having done so, they are now being ambushed by the Government under the Bill. The victims are normal taxpayers who rely on the Government's legislation in good faith, and they have been badly let down.
	In addition, the anti-avoidance legislation has been drafted so that the individuals concerned will now have to submit two self-assessment returns for this tax year properly to reflect their tax affairs. So those individuals whom the Government encouraged to incorporate now face not only an increased burden of corporate regulation, but no tax incentive whatsoever and considerable complexity in self-assessing their tax affairs.
	I can only add to the request made in support of my hon. Friend the Member for Eddisbury (Mr. O'Brien) by asking the Government to undertake a regulatory impact assessment to ensure that the measure has been properly thought through. As has been mentioned previously, IR35 rules were originally written specifically to exclude domestic staff, presumably because the amount of tax and national insurance contributions at stake was not very high—the figure of £15 million has been suggested. I should like to understand better whether that has changed dramatically, which would be surprising given the figures suggested.
	The Government are obsessed by tax avoidance, and that is obviously not necessarily a bad obsession, but their approach in this case has hit legitimate businesses that have set up companies to help the organisations that they serve. They are not avoiding tax and, moreover, they provide the very flexibility in the labour market that the Government say that they are trying to encourage and that is an asset to this country.
	The Government criticise other EU countries for their lack of labour market flexibility, but they appear to be piling on more and more regulation domestically and introducing more taxes and tax measures that undermine the asset about which they boast. That cannot continue.
	I support amendment No. 8, as the Government's proposed changes to the law will put an unnecessary burden on individuals who do not deserve to be persecuted in this way. I ask the Government to recognise that they should have listened to the warnings from my Front-Bench colleagues during consideration of last year's Finance Bill. They should seriously consider accepting the amendment, which will at least attempt to salvage something from this shameful sequence of events.

John Burnett: May I too welcome you, Mr. Gale, to the chairmanship of our proceedings this afternoon?
	Opposition Members are absolutely right to say that the Government have actively encouraged people to incorporate. However, in this case, the commissioning contractor—for want of a better expression—often insists on dealing with an incorporated person and they do so for reasons of saving tax themselves. We debated that at length when IR35 was introduced, and I consider the changes made then and these changes to be outrageously unfair. Obviously, when the changes are made, additional national insurance contributions will be payable by the subcontractor; nevertheless, no additional employee benefits will accrue or be available to those subcontractors. In other words, they will pay and they will get nothing, and they will also be subjected to an additional burden of bureaucracy.
	Finally, I should like to ask the Paymaster General whether she could let the Committee know whether the Government yet have any proposal to make the fiscal penalties for disincorporation more fair and less punitive.

Jonathan Djanogly: My hon. Friend the Member for Eddisbury (Mr. O'Brien) described in detail and extremely well how the provision could affect some of the poorest workers in our country. While totally concurring with him, I should like to examine the other side of the coin and explain how the clause will attack middle-class, middle-earning, aspirational and hard-working parents, particularly women. I shall do so in relation to the implications of applying IR35 and how it will affect nannies. That will cost parents who take advantage of the existing regime hundreds of pounds a year. We are talking about extra charges of at least £6 a week and probably £10 or more in London.
	Outside London, the average nanny's wage is about £235 a week net of tax, and it is likely that parents will lose about £312 a year. I note that that is some £60 more than the new child trust fund that is being introduced. One tax partner at Grant Thornton said:
	"If you employ a nanny or housekeeper, the chances are you will pay around 25 per cent. more for the service now this tax break has been removed."
	Parents will therefore have to start paying a triple whammy—their own national insurance, presuming that they work; the employer's national insurance contribution for their nanny and, of course, any other domestic staff; and their nanny's own national insurance bill, because parents traditionally take care of their nanny's tax and insurance liabilities.
	For example, a working mother would have to earn a gross salary of £30,345 simply to pay her nanny a gross salary of £20,400, netting some £300 a week. That shows how middle-class parents are being hammered at the moment. The mother's own annual net pay after tax and national insurance deductions would be about £22,350, while the cost of employing her nanny—including employers' national insurance contributions, which are additional to the nanny's gross wage—would be £22,360. Of course as nanny's wage grows, the triple-whammy effect gets worse.
	The Government provide help with child care through the working tax credit, but although that payment is worth up to £200 a week for people with approved child minders, it is important to note that, despite ongoing lobbying on that point, the Government refuse to apply registration to nannies. Child minders are mostly registered through Ofsted and regulated by national standards for day care and child minding, but nannies are not approved in that way. In addition, parents with a joint income of £58,000 or more will not be eligible for child tax credits.
	We have increasingly seen a move towards nannies and parents going underground in relation to employment, and that will increase under the clause. One of the worst-kept secrets in the capital is that probably as many nannies work outside the tax system as inside it. People do not want to do things that way; they are being forced to do so by a system that does not take notice of the needs of middle-class parents in this country.
	Of course this tax affects women in particular because their salary normally pays for the nanny. Most women will have a very difficult decision to take when they have children: should they stay at home, or should they go back to work? They will want to go back to work to keep their minds ticking over and to keep their trade experience up to date, but in effect they will do so to pay for the nanny, as the figures that I have given show, rather than to provide themselves with any additional salary, so we are talking about an additional tax on women. I thought that the Government were in favour of getting women back to work, but they are clearly in favour of getting people whom they see as being lazy and sitting at home back to work but not doing so for aspirational, hard-working middle-class women who want to get out and do something for this country, and we desperately need to get more women back into the labour force.

John Redwood: Although I see my hon. Friend's point that some might be tempted down the path of illegality into the black economy, does he not agree that many of the professional women about whom he is talking, who wish to return to work and have every right to do so, would never dream of going down that path, as it would be against their principles and would prejudice their important employments, in which they are expected to be decent, honest and upright? Will not this therefore be a tax that stops women having the freedom of choice that they should have? It will be very bad news for them and will put them off returning to the labour market, which may result in their losing their confidence in future years.

Jonathan Djanogly: I agree absolutely. This Government are not considering aspirational women who want to get out there and improve themselves. My constituency currently has virtually no unemployment, and is one of the fastest-growing areas of the country—a fact of which I am very proud. When I visit local businesses, I am told consistently that there are serious problems with recruitment: they cannot find the people to fill the jobs, and they cannot find people with the necessary skills. Thousands of women in this country are highly skilled and want to work, but they cannot do so because of the current tax system. I hope that that provides some spur, while going in the opposite direction, for the Government to rethink this issue.

Dawn Primarolo: It may help if I explain to the Committee how the mechanism works in relation to service companies, why domestic employees were exempt last year, and why the Government acted this year. That will lead me directly on to some of the hon. Gentleman's points.
	Although I appreciate and understand the important points that Opposition Members have been making about a company being incorporated or unincorporated, they are sorely mistaken on the focus of this specific measure. I want to explain to them why that is. In relation to the decision last year to exempt domestic employees, what has happened subsequently confirms the point that the Government repeatedly make: if a loophole is left, unfortunately, somebody will try to exploit it.
	The existing service company legislation ensures that workers who would have been taxed as an employee if they had been working under a contract with the client cannot avoid paying tax and national insurance on the same basis as any other employees by using a limited company or other intermediaries to sell their services. As I have said, the current legislation does not, however, apply to engagement in a domestic capacity. Regrettably—again, this point has been made repeatedly since 1997—the Government have to have mind to how taxpayers will behave towards the tax system. Our duty is to ensure that the right amount of tax is collected and that it is collected fairly: by that, we mean that those who should be paying tax do not find artificial ways of not paying it, as that is patently not fair to all other taxpayers. In advocating a higher rate of tax, the hon. Member for North Norfolk (Norman Lamb) fails consistently to understand that it is important to ensure that people pay the tax that they are supposed to be paying.
	Generally, schemes operate by setting up the domestic worker as a director and shareholder of a personal service company. The individual employee therefore starts off as an employee of the client. Subsequently—not because it improves the employer-employee relationship or because the employer is interested in helping self-employment grow—the positioning of an intermediary is used simply to reduce tax. I shall explain how that works.
	The domestic company is set up for the domestic worker so that the domestic worker is a director and shareholder of the personal service company. The service company offers the services of the director to the former employer. The domestic worker takes a salary from the company at around the personal threshold of £4,615, and the remainder in dividends. Therefore, if the company net profits are below the threshold for the starting rate of £10,000, the domestic worker can extract up to £14,615 free of tax and national insurance contributions.
	Let me remind the Committee: somebody who was an employee is then encouraged to use an intermediary to reduce the cost to their previous employer or to increase the payment to them by setting up the service company.

John Burnett: rose—

John Baron: rose—

Dawn Primarolo: The hon. Gentlemen should let me finish, as they need to know what was being marketed. I will then challenge them to say what they would have done were they in government. We did not act out of some fickle desire: there was proof of what was going on, and I shall give that proof to the Committee.

John Burnett: Will the Paymaster General give way?

Dawn Primarolo: I will not. If the hon. Gentleman will let me explain this complex point, there will no doubt be plenty of time for interventions.
	The scheme providers usually charge a monthly fee for operating the scheme. Effectively, the domestic worker still receives a weekly or monthly payment, albeit that it might be a larger amount because of the savings that the scheme produces through avoidance—the savings might be split between the former employer and the domestic worker, or the former employer might take all the benefit.
	It was right to ask the question—we did not think that leaving domestic workers outside the system would not raise issues, and as with all points of the tax system, we give careful consideration and follow developments. We had been approached by several parties, however, of which I will give one example, about the number of schemes that were about to be marketed to exploit the loophole. The schemes were able to offer significant savings in tax and national insurance contributions to any domestic employee with net weekly earnings above £111 a week. In terms of the attitude to the Government action, let met quote Leonie Kerswill of PricewaterhouseCoopers:
	"IR35 previously exempted domestic staff, but the cost savings of the arrangement for parents employing nannies has led to an explosion in the use of service companies".

John Baron: Will the Paymaster General give way?

Dawn Primarolo: No. I will finish making this point and then I will give way to the hon. Gentleman. I am trying to explain this complex point, giving the proof for why the Government acted in this way. I will give way at the relevant point.
	Bearing in mind the tax and national insurance savings, the Government were faced with a significant problem. For example, a letter was circulated to every client of a particular agency that runs the arrangements for nannies. The letter states:
	"As you will see, we do not believe that the use of a personal service company represents best practice in nanny employment because they involve the use of a tax-saving vehicle which obscures the real employer/employee nature of the relationship between parents and their nannies, with some attendant loss of employment rights for the nannies",
	most of whom are women. The hon. Member for Huntingdon (Mr. Djanogly) was concerned about women's rights.
	When the measure was announced and comments were made about the Budget, on Saturday 12 April The Daily Telegraph reported the managing director of Nannytax as saying:
	"We cover all types of domestic workers—housekeepers, gardeners, butlers, as well as nannies. The decision to close the tax-break loophole was appropriate. We think the relationship between, for example a family and a nanny, should be one of employer and employee. Nannies who were employed as a private company were losing employment benefits such as maternity leave and some pension rights."
	The fact that the exemption was about to be exploited on a massive scale was flagged up to the Government in the run-up to the Budget, along with the attendant loss of income to the Government and the difficulties that would be created for employees.
	Nursery World is concerned with issues that relate to child care and nannies. In a poll, it asked:
	"Is it a good idea for nannies to become limited companies?"
	Some 36 per cent. said yes and 62 per cent. said no. The clause is not about self-employment. It relates to employees and the problems created by a mechanism that is driving them into a relationship that leads to a diminution of their rights and a loss of tax revenue. The Government have acted now to avoid extensive use of the mechanism before it creates the many problems that the hon. Member for Huntingdon flagged up about families making those arrangements only to find the loophole closed.

John Baron: Does the Paymaster General accept that there is a gross injustice? Those problems should have been thought through before the mechanism was introduced last year. The Government have in effect encouraged many self-employed unincorporated people to incorporate, and in the following year have ambushed them with the tax measures in the Bill. That appears to many outside the Chamber as grossly unfair. Will the Paymaster General address that central issue?

Dawn Primarolo: The hon. Gentleman is entirely wrong. The Government have done no such thing. We made our position on IR35 clear when we debated last year's legislation. The clause is not about the rights of people to be self-employed or employed; nor is it about the right of people to have their own companies; it is about the use of a mechanism that is designed only to reduce the amount of tax paid.

George Osborne: rose—

John Baron: rose—

Dawn Primarolo: No, I shall not give way.
	I am describing a tax distortion that has been driven by a particular arrangement in the tax system by which people choose to be employees and are in danger of being required not to be.

Howard Flight: When we debated the new zero rate of corporation tax for small companies in the last Finance Bill, we welcomed the general principle but stressed that to introduce it without a parallel or averaged rate for sole traders made it an obvious tax incentive for people to incorporate and exploit. Indeed, I made the same point when I wrote to the Paymaster General some eight months ago. I said that it was wrong in principle to have rules in our tax system that act as a massive incentive to incorporation and to the exploitation of the advantages that it brings. The Federation of Small Businesses made the same point. The issue is specific, but it is part of the wider territory. If there is such a big distortion in our fiscal arrangements, it is inevitable that people will try to exploit it at all levels.

Dawn Primarolo: The clause is not about individuals who choose to be self-employed or to incorporate. It deals with a specific aspect of the tax system. The exploitation of a loophole was driving people into a particular tax position simply to save tax for their previous employer or themselves, or to share it equally. The hon. Gentleman will know that from our discussions on IR35.
	The wider debate, which the hon. Gentleman verges on, relates to changes to incorporated and unincorporated companies, and whether that balance is correctly struck. I believe that it is, but that should not be debated in the context of this clause. I accept that many hon. Members, and people and companies outside the House, want the issue to be explored further. We must always find a basis on which to strike a balance, but that is not what we are dealing with now.
	Hon. Members asked why we are making the change now, and I have set out our reasons. They asked how the mechanism was being exploited and why, and I have made that clear. The debate is not about incorporation or unincorporation; it is about whether we should leave a mechanism in the tax system that leads not only to a loss of tax revenue but to a diminution of employment rights, and all because of a loophole.

John Burnett: The Paymaster General is invariably fair, and I think she would agree that it is right to put it on the record that there are tax consequences in making distributions out of companies to individuals. However, I sincerely hope that she will deal with the point that I raised. If incorporated sub-contractors pay full employee national insurance contributions, surely they should qualify for full employee benefits.

Dawn Primarolo: The hon. Gentleman teases me back to the debate that is at the heart of the changes known as IR35: does the individual operate as a shareholder or an employee of his or her own company? If they operate as an employee of their own service company, they get all the rights that all employees get.
	As for opinions within the relevant employment sector, it is interesting to note what is said in an article in Professional Nanny. The article asks whether nannies are being urged to become directors of their own companies and says that
	"if all nannies saw themselves as young Richard Bransons, eager to make their first million, then maybe running their own service company might be an irresistible prospect. But in reality, many nannies are in their first or second job, dedicated to the children they are responsible for, and looking to the parents to protect their interests both as an employee and as a new member of the family."
	It is incumbent on the Government to protect nannies' best interests. The temptation provided by the loophole has been removed precisely to protect those nannies.

George Osborne: The right hon. Lady would accept that the driving force behind the provision is the high cost of child care. I received a copy of the letter that she read out, but resisted the temptation to take up the offer, because a friend of mine who is a tax barrister told me that the Treasury would close that particular avenue. However, does she accept that dealing with what she calls tax avoidance is likely to cause an increase in tax evasion? Has the Treasury analysed whether there will be an increase in the already large number of working nannies who will be outwith the tax system altogether?

Dawn Primarolo: I am glad, but not surprised, that the hon. Gentleman decided to resist that temptation on the sound advice of his friend—that clearly supports the case that I have put to the Committee this afternoon. The position of nannies as people who are employed by a family or supplied by agencies remains unchanged, but we have removed any driver that might change that relationship. He will remember that, in the letter to which he referred, the company made it clear that it expected the Government to close the loophole because it was neither reasonable nor fair. For those reasons, it is inappropriate, to put it mildly, to accept an amendment that leaves in place, even for a specific period, the arrangements that gave rise to that loophole. I urge the Committee to reject it and support the clause.

Stephen O'Brien: Much of the Paymaster General's riposte concerned nannies, but let us not lose sight of the fact that the provision will affect cooks, gardeners and many others in domestic service, not all of whom are subject to the arrangements that she sought to pray in aid. As we predicted, she sought to defend the provision as an anti-avoidance measure. The Treasury, having found out from its scouts in the City that somebody, somewhere had come up with a clever wheeze and was beginning to market a new product, decided to put a stop to it.
	The Paymaster General has missed the point. We oppose the provision not because it is an anti-avoidance measure but because it lets down people on relatively low incomes who, encouraged by last year's Budget, acted in good faith. They are now being slapped down and face a regulatory burden of two self-assessed tax returns in the current tax year. The amendment would reduce that regulatory burden. Furthermore, the Paymaster General never bothered to answer my serious question about why there is no requirement for a regulatory impact assessment because, I dare say, she would not like the answer that she would have to give.

Dawn Primarolo: I apologise to the hon. Gentleman. I did not mean to avoid his question, I just forgot to answer it. A regulatory impact assessment is not included because, as he knows, the Government are not required to carry out such assessments of anti-avoidance measures, although he is challenging that. The costs are in the Red Book, but it is impossible to say how much the problem would continue to grow. The experience of the last Conservative Government of profit-related pay shows that initially payments are small but they end up being very large.

Stephen O'Brien: The Paymaster General is quite right—there is no obligation to produce a regulatory impact assessment. We have had many discussions about that when debating secondary legislation. Even though it is not required, in some cases it is offered, and we receive letters about that. The provision under consideration would have been a worthy candidate for such an assessment.

John Gummer: Has my hon. Friend noticed that if the Government decide that any measure is an anti-avoidance measure, they are able to tell the Committee, "We do not need to give you the information that we ought to have"? We should point out to the Committee that that is a dangerous argument that leads to self-assessment and self-regulation.

Stephen O'Brien: I thank my right hon. Friend, not least because he speaks with experience of government. I am grateful for the opportunity to point out to the Committee, particularly to those who were detained elsewhere at the outset of our debate, the fact that I said that a theme of the Bill is to arm-wrestle as much of its content as possible into the cloak of anti-avoidance in a blatant attempt to stifle scrutiny and criticism. That arrogant approach, I said, was less about anti-avoidance than about a futile attempt by the Government and the Treasury at anti-accountability, which will not fool the hard-working citizens of this country. That answers precisely the point made by my right hon. Friend, with whom I could not agree more: anti-accountability is the inherent culture of this Government. There could have been recognition of unintended consequences in the clause, and the Government could have used it to close a loophole. However, they have blatantly disregarded our arguments, and the clause is now a slap in the face for domestic workers who have incorporated.

John Bercow: Given that the Government have consistently spun the policy as a response to abuse by fat cat entrepreneurs, and given that my hon. Friend made the seminal point that its main victims will be some of the most vulnerable people in our society, would it not be helpful to know how many cooks, cleaners and gardeners may be affected by the provision? The Opposition have a responsibility to communicate to those people the scale of the damage that the Government are inflicting on them.

Stephen O'Brien: It is impossible to give those numbers without a census, but it certainly is our duty to speak up for those people. It is interesting that Mr. Neil Hamper from the Federation of Small Businesses said that people running their own businesses should be able to choose which business model suits them best. They should not have to contend with the hoops and hurdles of incorporation to secure generous tax breaks. That is the problem: people incorporated to take advantage of a tax break touted by the Government. My right hon. Friend the Member for Wokingham (Mr. Redwood) properly pointed out that the extent of that incentive depends on the way in which the differential is measured, but there is a differential none the less, so the incentive remains. Seeking to end an abuse that has not been proven is, in fact, an abuse by the Government.

George Osborne: My hon. Friend has spoken about consultation and its impact. Has he had the opportunity to discuss the matter with the hon. Member for St. Helens, South (Mr. Woodward), an expert on these matters, who may have been able to help him draft amendments?

Stephen O'Brien: I am grateful to my hon. Friend for that colourful example. I gave a speech in St. Helens only the other day, but did not spot the hon. Gentleman or his alleged butler.
	We have a duty to point out the unintended consequences of the clause. However, the Government have made plain that its intended consequence is a slap in the face for certain people. They have slammed the door shut on people who took advantage of a tax break in good faith. We should speak up for the people whom my hon. Friend the Member for Buckingham (Mr. Bercow) mentioned, and I urge my right hon. and hon. Friends and everyone else who accepts the power of these arguments to join me in the Lobby.

Question put, That the amendment be made:—
	The Committee divided: Ayes 172, Noes 283.

Question accordingly negatived.
	Clause 135 ordered to stand part of the Bill.

Clause 138
	 — 
	Approved Share Plans and Schemes

Question proposed, That the clause stand part of the Bill.

Howard Flight: There is a broad measure of agreement between hon. Members on both sides about the merits of employee share ownership. The changes introduced by the clause are intended to provide relief and make more flexible the share incentive plan or SIP arrangements, save-as-you-earn option schemes and the company share option plan or CSOP.
	I believe passionately that as many people as possible should own shares in the businesses for which they work. All the evidence shows that companies with widespread employee share ownership perform better and have much better human relations. Such ownership clearly engenders an owner-employer mentality rather than a them-and-us mentality. Businesses such as the John Lewis Partnership, which has succeeded so well on the back of employee share ownership, are legendary.
	The arrangements generally give greater flexibility in the administration of share plans. That includes, for example, the removal of the former requirement that, in order to be tax-free, a CSOP option must be exercised more than three years after a previous tax-free exercise. Furthermore, an individual will be able to participate in more than one connected SIP in a tax year—that is, he can participate in one or more approved SIPs established by his company or a connected one. However, three aspects of the arrangements are unsatisfactory, and the industry and associated advisers, including ProShare and many of those concerned with encouraging employee share ownership, have made criticisms and contacted the Treasury to seek changes.
	Of particular concern is the change to rules about pay-as-you-earn and the national insurance contribution in relation to CSOPs exercised within three years of grant. The change is clearly unfair and will cause some problems. It should logically apply to options granted on or after 9 April this year, rather than options exercised after that date. The change to options exercised on or after 9 April has two implications for companies that are retrospective in nature.
	The employer will now be responsible for withholding PAYE and NICs from employees, although he can under law deduct those payments from an employee's cash pay. There are strict rules in that regard. If the employee has already been paid for the month or his net pay is insufficient for deduction of the new PAYE and NIC liability, the employer will not have sufficient funds to pay the required sums to the Revenue. It is extremely rare for approved plans, unlike unapproved ones, to contain a provision to prevent exercise of the option if satisfactory arrangements to deal with PAYE and NICs cannot be made. The reason for that is that such provision has not been necessary in the past, as there has been no obligation to apply NICs or PAYE.
	The new rule will therefore mean that employers will often have to pay PAYE and NICs without having any practical method of recovering the costs from employees. The employer will also have their own NIC liability on the exercise of the options. Typically, it will be set at 12.8 per cent. of the employee's option gain. As the new rules apply to options exercised on or after 9 April this year, the employer will have a new liability for which they could not previously have provided. When the NIC rules were amended to allow employers to transfer to employees the NIC liability on unapproved share schemes, many companies attempted to include such provisions in their approved share option plans as insurance against NICs being charged to them, but the Inland Revenue refused to approve share option plans that contained such provision.
	A point of principle is at stake. The Government's argument for applying NIC on unapproved plans was that gains from such plans were liable to income tax, so the contributions went together. Approved plans remain under the capital gains tax regime, however, so there is an issue of principle about whether it is appropriate to charge NICs at all.

Jonathan Djanogly: My hon. Friend makes a good point in saying that, when people try to amend approved schemes, the Inland Revenue throw them out of the door. We are talking not only about a tax implication, but significant cost implications, because many professionals will have to be paid to redo schemes.

Howard Flight: I thank my hon. Friend for that accurate point.
	I apologise, Mr. McWilliam, for not having welcomed you to the chairmanship of our proceedings. It has always been a great pleasure to have you as Chairman in Finance Bill Committees.
	The proposed arrangements will require trustees to maintain records of those who have participated in one or more approved share incentive plans. That presents a problem in that, to maintain records of such participants, the trustees will need the full requisite information. It should not be a breach of the plan conditions if the trustees fail to maintain such records as a result of not receiving the necessary information from the company or the participants concerned.
	The retrospective nature of the application of NIC charges to company share option plans will particularly hit companies that allow employees to take options with them when they leave. Such a company would find itself paying the PAYE tax and employees' NICs, as well as the employer's NICs, and would be lucky to make the payments to the accounts office in time, assuming that it knows that the exercise has taken place. Indeed, despite the statement in the Budget notes that the motivation behind the provisions is to close a loophole, there is a broad belief in the share scheme world that CSOPs have not been promoted as an NIC mitigation tool, especially given the continued low limit of only £30,000 of participation.
	Companies sometimes seek to maintain approved status during a takeover as part of their general tax and NIC arrangements. In that context, some small firms may have tried to sell the CSOP to private companies that are looking for an exit on the full understanding that the options would be exercised within three years without the NIC liability being payable. Many of those companies can now benefit from the EMI—executive management incentive—plan arrangements and can exercise them when they wish without paying any tax or NICs, but those that cannot benefit from EMI will now be in a less advantageous position whereby they use the CSOP instead. The chief concern is that the provision applies to all existing options. Although the provisions that allow employers to transfer their NIC charges to the employee can apply to CSOP options, it is extremely difficult to make that happen. This is a fundamental issue. The Government may ultimately decide that the measure will not yield much tax, but if the legislation has to change, it should apply only to future, not existing, option grants.
	Another aspect of the proposals is intended to be helpful, but looks to be unworkable—that is, the changes to ease the complexity of the dividend share provisions. Those are contained in paragraphs 9 to 15 of the schedule, which we will debate Upstairs. I understand that the Government recognise the weakness of the proposals and intend to withdraw them for reconsideration. I should be grateful if the Paymaster General could confirm that.
	Another important issue is the threat to employee share ownership in the shape of the proposed requirement by the International Accounting Standards Board that all forms of subsidy towards employee share ownership are charged to the profit and loss account. It is clearly understood that the background to that is abuse in the US, but if it becomes the accounting rule here, it will lead to a major contraction in employee share schemes and do much more to undermine the positive aspects of clause 138 and the accompanying schedule. It is, of course, not for politicians or Governments to tell the professional accounting bodies what to do, but it is important that they realise the extent of the threat to employee share ownership. The theoretical accounting arguments are very much balanced on both sides.
	Conservative Members want to ensure maximum employee share ownership for the good of businesses, the good of individuals and the overall good of our economy.

John Burnett: I, too, welcome you to the chairmanship of the Committee, Mr. McWilliam.
	The notes to the Bill state that clause 138 deals with
	"tax relieved, employee share and share option schemes designed to encourage employees to identify with the success and growth of the companies for which they work."
	Of course, we support that aim.
	An increasing amount of legislation, certainly in Finance Bills, is increasingly complicated, and Opposition Members rely heavily on briefings from outside bodies. The hon. Member for Arundel and South Downs (Mr. Flight) highlighted the problems with the clause, which is designed to simplify procedures. Will the Paymaster General tell us what consultations the Government have had with professional bodies such as the Law Society, the Institute of Chartered Accountants, other accountancy bodies, the Bar Council and the Chartered Institute of Taxation? I hope that the Government will listen not only to the submissions of the hon. Member for Arundel and South Downs, but to those of the professional bodies. It is in all our interests to have a satisfactory, tax-efficient, un-bureaucratic system that encourages employee share ownership and acts as a first-class incentive to employees. It is important that employees feel part of the ownership of an organisation. Organisations that have such schemes are shown time and again to thrive and grow.

Jonathan Djanogly: At a time when many, if not most, option holders have been saying that their options are going underwater and that their participation in the equity of their company is being wrecked, why do the Government feel that now is the time to start cracking down even further on such schemes? With 600,000 jobs lost, tough times and low productivity in the manufacturing sector, is not this the time to encourage share participation and involvement by employees? To that end, why does not the clause, rather than punishing people through tax, increase the use of approved schemes by, for instance, raising the limit of £30,000 to £100,000?

Dawn Primarolo: First, I want to remind hon. Members of the huge amount of taxpayers' money that we commit to supporting share ownership. Combined tax and national insurance means that the figure is rising to just under £1 billion a year, involving approximately 2.5 million employees. That figure is also rising.
	The hon. Member for Arundel and South Downs (Mr. Flight) is right to extol the virtues of approved employee share ownership schemes in their varying guises in not only rewarding employees but giving them a stake in their company. That leads to the associated benefits in productivity and staff commitment. He will also know that many views exist about the administration of such schemes. As David Cohen, head of employee incentives at Norton Rose, explained recently in an article on the proposals for employee share schemes:
	"This is an area of Tax Law which"—
	he phrases it delicately—
	"has always been an active battleground between the Revenue and Tax Payers."
	That has happened not recently, but over time. He continues:
	"The Revenue's abiding concern is that share schemes will be used to remunerate employees"
	in a way that is proper. He points out that often, taxpayers are motivated to do exactly what the Inland Revenue is trying to minimise.
	It has always been a Government objective and, I presume, a goal of the previous Government, to try to ensure that the patchwork of rules and regulations that have built up over the years should be as clear and simple as possible, given that the subject is already complex.
	Let me deal briefly with consultation. Over several years, the Inland Revenue has been in extensive dialogue with the representative bodies, especially those that are most concerned with employee share ownership schemes. Many comments have been made over that period about desired changes to legislation. The Inland Revenue drew on those dialogues and representations in drafting the changes that are incorporated in the Bill. I recommend the article by David Cohen in this week's "Tax Journal", which clearly sets out the main principles that needed to be tackled and would be helpful to the scheme. I am eternally grateful that they bear a startling, almost identical resemblance to the Government's actions. Dialogue and consultation have therefore been going on for some time.
	Consultation does not always guarantee that there will no subsequent changes. The hon. Member for Arundel and South Downs referred to that. Sometimes representative bodies recommend actions about which they might not have consulted extensively in their organisations. They might subsequently find that they do not quite fit. I will deal with that and the changes that the Government might make later.
	The clause introduces several changes to employee share schemes to make them simpler and more flexible, with the caveat that they are not necessarily straightforward in the first place.
	The provision is focused on the tax and national insurance advantage of approved share schemes. The Government remain committed to employee share schemes as an important means of increasing productivity. We acknowledge the positive effects of staff motivation. For example, a large proportion of the FTSE 100 companies have some sort of approved scheme. More than 850 companies granted more than 4,500 options under the enterprise management initiative in 2001–02. Executive management incentive—EMI—was introduced for the smallest and newest companies to help them to recruit and reward the high-calibre staff that they need in order to grow.
	Even during the current low in the stock market, companies have continued to introduce and develop their employee share schemes because they are a long-term investment. They are intended not to provide short-term gain but to give employees a long-term interest in the success of the company for which they work.
	The changes that clause 138 introduces are only the latest in a series of improvements that we have continued to make to employee share schemes. Other provisions introduce the statutory corporation tax deduction for companies that offer employee share schemes. Last year, we worked closely with my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on the Employee Share Schemes Bill to introduce some positive changes, which would encourage share incentive plans.
	The changes in this Bill will affect all the improved employee share schemes. We are proposing a key change to share incentive plans—SIPs. The SIPs scheme is one of the two newest schemes, which the Finance Act 2000 introduced. It was designed after extensive consultation and it is intended to fulfil the needs of all companies. It offers them flexible methods of achieving employee share ownership, with tax advantages for employees and the companies that employ them. As the hon. Member for Arundel and South Downs acknowledged, SIPs have been widely welcomed. To date, some 750 companies have applied for Inland Revenue approval of their plans and more than 500 have been implemented or are ready for implementation. We have listened over time to the share scheme industry's ideas on ways to improve the administration of the schemes.
	The changes in the Bill to ease administration for employers respond to industry requests. They have been generally welcomed but the industry has expressed anxiety about the proposed change to the rules for dividend shares. Although the change achieves the simplification for which the industry asked, it appears that those who requested it did not establish its full impact with scheme administrators. Feedback from the industry suggests that it would prefer to retain the existing rules. So, since the Government listen to business—

George Osborne: That was said with feeling.

Dawn Primarolo: Perhaps we should not have listened in the first place. I shall table amendments in Standing Committee to withdraw the new proposals, in line with the industry's request.
	The package also includes changes to modernise the older approved schemes—save-as-you-earn and the company share option plan—that were developed in a more regulated climate. The provisions align the company share option plans and the save-as-you-earn rules with those of a SIP when possible and appropriate, to help reduce administration of the schemes.
	Clause 138 also introduces changes to extend the application of pay-as-you-earn to any income tax due after early exercise of a company share option plan. That is not a new tax charge. Early exercise in three years of grant of a company share option plan option currently attracts a tax liability but it is collected through self-assessment and does not attract national insurance. Unfortunately, we have become aware of evidence that company share option plans are being granted and exercised within three years solely to avoid national insurance, and not for any sound commercial reasons. That is not fair on the majority of employees who pay their national insurance contributions, nor is it in line with the objective of encouraging employees to take a long-term stake in the success of their company.

John Burnett: Will the Paymaster General address a more hazardous aspect of this issue—namely, the possible penalty on the declining value of the shares?

Dawn Primarolo: An initial problem that we need to address with regard to avoidance is when options are given for shares for 100 years' time, for instance, and the value is rather difficult to quantify. The tax charge is then levied and the benefit year is reassigned—and, lo and behold, it is within three years. There were some difficulties in regard to that, and I appreciate the point that the hon. Gentleman raises, but this is always a challenge. How can I put this delicately? If a set of rules is to operate fairly for everybody, everybody has to use those rules fairly. When some do not, they can spoil it for others.

John Bercow: Will the right hon. Lady give way?

Dawn Primarolo: I would like to make some progress, but I will be happy to give way to the hon. Gentleman later.
	The change in the Bill will treat company share option plans exercised early in the same way as any other unapproved option. That will not only help to encourage employees to hold their options for three years to qualify for tax and national insurance relief but make collecting tax through the PAYE system simpler for the employee. We recognise that there are some difficult circumstances in which people have no choice but to exercise their options early. Other company share option plan changes that are being introduced as part of this package will ensure that employees who exercise options within three years of grant because of injury, disability, redundancy or retirement, for example, will be able to do so tax and national insurance-free. That recognises the hard choices that people sometimes face in their employment. We are trying specifically to deal with that issue here.

John Bercow: Will the right hon. Lady give way?

Dawn Primarolo: Not at the moment.

John Bercow: I was going to be helpful.

Dawn Primarolo: I thank the hon. Gentleman but I can manage under my own steam at the moment. Should I need his help, I shall certainly call on him.
	The further changes proposed will modernise company share option plans and ensure that they continue to be attractive vehicles for employers wanting to encourage employees to take a stake in their company. That package of improvements is further evidence of the Government's continuing support for companies that offer employee share schemes. The changes result from listening to and working with practitioners. Indeed, ProShare, the organisation that exists to promote share ownership, has already signalled its appreciation of most of the changes.
	The hon. Member for Arundel and South Downs raised a number of questions about the national insurance charge. The Government believe that employers should pay their fair share of national insurance on all forms of employment-related remuneration. While the majority of employees and employers undertake their tax responsibilities diligently, there remains a small but, unfortunately, significant group that seeks to avoid paying tax and national insurance contributions on employment remuneration. The change means that companies that seek to avoid paying national insurance can no longer do so. Employers face an employer's national insurance charge only if the options that they have awarded are capable of being exercised within three years of grant. Employees exercising their company share options within the three years of grant will be able to do so tax and national insurance-free. That means that employers who have been using company share option plans as intended—that is, to encourage employees to take a long-term stake in the company that they work for—will not be affected by the changes.
	We have also been careful to protect employers from the employer's national insurance charge when employees have to exercise their option within three years. That relates to the point that I made earlier about employees being forced to exercise their options. It is a matter for companies and employees to make provisions and arrangements for the recovery of any PAYE and national insurance contributions from employees who exercise early and have a tax liability.
	The hon. Member for Arundel and South Downs also raised some issues about PAYE and asked whether the measure was retrospective. The charge arises if employees exercise their option after 9 April 2003 and within three years of grant. If employees exercise their option in those circumstances, they do so in the full knowledge of the tax and national insurance charge that will arise—that is, on the basis of the law as it applies on exercise. That change will not prevent employees from exercising early for commercial reasons. They will simply make the decision taking into account the tax and national insurance to be paid. A company share option plan is designed so that employees can take a long-term stake in the company that they work for. If employees keep their options for at least three years after grant, they can be exercised tax and national insurance-free.

John Bercow: Will the right hon. Lady give way?

Dawn Primarolo: No.
	The hon. Member for Arundel and South Downs also raised the issue of tackling avoidance using company share option plans, and the question of leavers. Failure to tackle avoidance would continue to undermine the share schemes that aim to incentivise employees, and he well knows that. As I made clear in my speech on Second Reading, measures to counter tax and national insurance avoidance would not damage business or investment in the City. On the contrary, this is about creating a level playing field by ensuring that a small number of businesses can no longer gain an unfair advantage over their competitors by avoiding their national insurance and tax contributions. We estimate that the tax and national insurance that will be protected by these changes will be in the region of £55 million in 2003–04, and between £30 million and £35 million in subsequent years. Employees who have to exercise their options within three years of grant because they have lost their job or for other reasons will be protected. In that way, we protect the innocent and stop the avoiders.

John Bercow: The Paymaster General began by appearing to lament the phenomenon of early exercise, but was then gracious enough to concede that there were circumstances in which employees would have no reasonable alternative but to exercise that option. Now that she has, with prescience, anticipated precisely the redundancy scenario that I was intending to depict for her, will she tell the Committee whether the loss of job to which she has just referred would also apply to circumstances such as the termination of employment unrelated to redundancy?

Dawn Primarolo: To be perfectly honest, I do not think that I understand the hon. Gentleman's question.

John Burnett: May I help?

John Bercow: Will the right hon. Lady give way?

Dawn Primarolo: I am spoilt for choice. Who will help me first? I shall ask the hon. Gentleman to repeat his question.

John Bercow: I am genuinely grateful to the right hon. Lady. She was being slightly churlish a few moments ago, because I had intended to compliment her on the intellectual osmosis that seemed to exist between us when she anticipated what I was proposing to say. I am not trying to be clever or unhelpful—that would be difficult for me—but simply asking whether the concession applies when someone is sacked, as opposed to being made redundant.

Dawn Primarolo: I clearly was not hanging on the hon. Gentleman's every word and listening as carefully as I usually do. The answer is no.
	The final point, to which the hon. Member for Arundel and South Downs and others have referred, not just in today's debate, and which is of concern elsewhere, relates to the International Accounting Standards Board's proposals. He will appreciate that its proposals for share schemes are not a Government initiative, and while the accountancy proposals are being developed, it would be inappropriate for the Government to become directly involved in the debate. However, I think that I have made it clear, as the hon. Gentleman certainly has, that we are committed to employee share schemes and continue to pursue a course that enables them to develop and benefit not only employees but the companies as well, and I hope that nothing will be done in future that would undermine that.
	I commend the clause to the Committee and look forward to the debate on the schedule.

Question put, That the clause stand part of the Bill:—
	The Committee divided: Ayes 291, Noes 135.

Question accordingly agreed to.
	Clause 138 ordered to stand part of the Bill.

Clause 139
	 — 
	Employee Securities and Options

Howard Flight: I beg to move amendment No. 12.
	Clause 139, which gives effect to new schedule 22, takes up some 80 pages of the Bill—

John McWilliam: Order. I think it would be unfair if I did not let the Committee know my thinking. It strikes me that debate on the amendment encompasses a clause stand part debate. I ask Members who intend to speak to bear that in mind. I have not finally made up my own mind, but I think it is probably the case.

Howard Flight: I thank you for that, Mr. McWilliam. Indeed, I was going to crave your indulgence that I might discuss the amendment in a wider, "stand part" context.
	As I said, the proposals in clause 139 take up some 80 pages of the Bill. It strikes me that they have been introduced in response to a court judgment that has proved a problem to the Revenue and needs to be corrected. There has, however, been no consultation on the provisions. Dare I say that it has been drafted extremely poorly? It contains a raft of potential new charges and burdens, some of which could be retrospective. To be candid, the proposals as they stand have received widespread criticism from the relevant professional bodies.
	The amendment calls for new schedule 22 to be suspended pending further consultation. The schedule's drafting constitutes a complete rewriting of the Income Tax (Earnings and Pensions) Act 2003, which came into force on 6 April. Indeed, it is a complete contradiction of that legislation; as the Bill stands, we will revert to an incomprehensible drafting.
	The scope and breadth of the proposals were not evident from the Budget speech and press releases—a point that is particularly true of the proposed changes to pay-as-you-earn and national insurance. A statute is being amended that had already been rewritten in plain language; however, the opposite effect is now being achieved. Formulae are used as in the rewritten legislation, but the acronyms used are not explained, save in the explanatory notes. For example, according to the explanatory notes the expression "UMV"—it is used in a particular clause—means "unrestricted market value"; however, it would be a great deal more user-friendly for such expressions to be included in the body of the legislation itself.

John Bercow: Can my hon. Friend advise me, in so far as he can interpret the thinking of the Paymaster General, as to how schedule 22 is consistent with the right hon. Lady's support for the tax law rewrite project, given the implication that that project is intended to simplify taxation?

Howard Flight: I thank my hon. Friend for making, in his splendid way, the point that I was making in a rather low-key fashion. This provision is a complete contradiction of any commitment to clearly drafted legislation. As I have pointed out before, eminent lawyers have described schedule 22 as
	"massively complicated and almost impossible to explain, even to . . . sophisticated people."
	The schedule, in
	"its Technicolor complexity, was introduced without any . . . consultation".
	As it stands, it is difficult even for the lawyer-experts to understand all the proposals.
	The Bill expands the definition of a "readily convertible asset". In particular, shares in a company under the control of another are to be treated as readily convertible assets. That gives rise to additional PAYE and national insurance liabilities for the employer when charges arise under the new legislation. Several of the changes apply to securities issued before 16 April this year. Before the Budget, shares could have been issued to employees on the basis of legislation then in place—only for those employees and their advisers to discover that the shares are subject to provisions that they could not have been aware of when the transactions were entered into. That, combined with changes to PAYE and national insurance, means that employers are likely to face tax charges for which they have not provided. In respect of national insurance, they will not be able to recover it from employees. The changes should not apply to securities issued before 16 April, where such unforeseen liabilities could arise.
	A new chapter 2 of part 7 applies to restricted securities. The provisions stop the avoidance of the income tax charge when securities are acquired by an employee subject to conditions or otherwise reduced in value. It is a tax-avoidance issue, which the Government understandably sought to address. The conditions were subsequently removed. Without the provisions, the growth in value of the securities would have been subject to capital gains tax. The schedule modernises the existing provisions and makes them more sophisticated. I welcome the fact that the powers provide for a number of elections, which will allow employees to pay income tax by reference to the value of the securities acquired at the date of acquisition on the assumption that some of the restrictions are not there.
	We are particularly concerned that the new raft of proposed legislation is highly complex and has not had adequate consultation. We appreciate the Government's desire to reverse the impact of the recent court ruling and to deal with the PAYE avoidance schemes to which I referred. However, the current drafting will leave many genuine share schemes in a serious mess and will overlay an already over-complicated regime, which could come to represent a material barrier to wider share ownership for unlisted companies.
	The catch-all drafting could result in a raft of unexpected income tax charges arising at various points during the period of ownership of the shares. The new PAYE and national insurance contribution rules will mean that charges arise when shares have not been disposed of. Venture capitalists with investee companies in which restrictions on shares are included in the articles could face particularly serious problems. There is a plethora of purpose tests, valuation tests and requirements to look back for seven years, which will mean that unlisted companies and owner-managed businesses will need to navigate most carefully through extremely difficult legal waters.
	We wonder whether the Revenue intends to issue any guidance on such matters as the meaning of market value—for example, when restrictions are in the articles of association of the company as opposed to when they are outside the articles. The effects of new capital gains tax, market value definition, the position regarding management buy-outs and what constitutes commercial purposes are all important issues.
	Many of the changes apply with immediate effect, and we are concerned that the new measures impose charges that people did not conceive of when the relevant share schemes were set up, and will leave people having to comply with legislation with which they are unfamiliar. Very little of the principles of the tax law rewrite has been included, as I explained.
	Another concern is the harshness of some of the provisions that could be mitigated by an election, which has to be made in a Revenue-approved form within 14 days of a transaction. I am led to understand that the Revenue has stated that it will not allow taxpayers to make an election before Royal Assent and will positively prevent them from doing so by declining to issue a prescribed form of election. The Revenue has stated that no provision or concession will be granted to allow elections for events that take place between 16 April and Royal Assent to be made within 14 days after Royal Assent. If that is the case, it strikes me as unethical, unfair and without precedent. It could cause real problems for clients who need to get things done before mid to late July.
	I end by echoing the comments of my hon. Friend the Member for Buckingham (Mr. Bercow). So much for the Government's commitment to clarity, transparency and fairness: the provisions in schedule 22 are an absolute nightmare. We have tabled many amendments, and I hope that the Paymaster General will respond by saying that she, too, recognises the need for very considerable clarification and better drafting, and for unintended problems to be addressed.

John Burnett: I endorse entirely what has been said by the hon. Member for Arundel and South Downs (Mr. Flight). All the information that I have received from the professional bodies leads me to conclude that the clause and schedule are exceptionally complex, and that there has been insufficient consultation.
	If City experts do not understand the clause, what hope is there for anyone else? Do the Inland Revenue and parliamentary counsel understand the clause and the schedule, and the repercussions and tax consequences that they will have?
	It is empty for Ministers to trumpet tax reliefs when they are so complex that they cannot be accessed. It is worthless for them to exclaim that they are seeking to simplify the tax system, when provisions such as the clause and the schedule only make the legislation more complex.
	The scope and breadth of the proposals were not evident in the Budget press release. That is especially true in respect of the consequences for PAYE and national insurance. I hope that the Paymaster General will concede that the amendment is entirely reasonable in the circumstances, and that there should be proper consultation. People need to understand the law, which should be readily accessible. It is in the interests not only of tax practitioners but of their clients and of businesses that they should be able readily to understand the law and its consequences. They must be able to access the law without undue risk or expenditure.

John Gummer: Does the hon. Gentleman agree that not only businesses or tax advisers need to understand the measure, but that it should be readily accessible to the people whom it affects? Is not one of the problems with the tax system that, if it is not accessible or comprehensible, people will feel that it is not fair? The Government must understand that this complication does not merely make matters difficult for the professionals—it makes them difficult for many people who are pretty ordinary as far as tax is concerned but who will be affected by the schedule.

The Temporary Chairman: Before the hon. Gentleman replies, I must inform the Committee that I have now made up my mind that there is no scope for a stand part debate. Whatever the conditions of the schedule, the clause itself is perfectly comprehensible. Hon. Members are going quite wide of that, but that is fine.

John Burnett: I am grateful to the right hon. Member for Suffolk, Coastal (Mr. Gummer) for making an excellent point. For taxation to achieve public acquiescence, it must be fair and intelligible. I draw the right hon. Gentleman's attention to the excellent memorandum, dated May 2003, issued by the revenue law committee of the Law Society, which gives pages of suggested amendments. I hope that we shall have an opportunity to probe those amendments so that we can try to make some sense of a complete mess.

John Bercow: Notwithstanding the pertinent point made by my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), does the hon. Gentleman not think it a pity that the Chancellor cannot be with us in Committee this afternoon, in order to explain how he squares schedule 22 with his foreword to Labour's business manifesto, entitled "Equipping Britain for the Future", published in April 1997, in which the right hon. Gentleman said—ho, ho!—
	"We will not impose burdensome regulations upon business because we understand that successful businesses must keep costs down"?

John Burnett: I am grateful to the hon. Gentleman for that intervention; he makes an excellent point. However, I hope that the Chancellor is busy squaring the Prime Minister on his view on the euro—

Hon. Members: What is your view?

The Temporary Chairman: Order. The debate is wide, but not that wide.

John Burnett: I shall not go down the euro road—

George Osborne: Oh, go on.

John Burnett: I know that would be welcomed by many—[Interruption.]

The Temporary Chairman: Order. Hon. Members should not encourage the hon. Gentleman.

John Burnett: I do not need much encouragement, Mr. McWilliam; that is the trouble.
	We shall be going into these matters in detail in the Standing Committee. Will the Paymaster General assure us that, having heard the arguments, she will acquiesce in this amendment, which is, in the circumstances, entirely reasonable?

Jonathan Djanogly: To date, my policy on the Bill has been to go for brevity, but I am not able to do so on this clause, not least because we are considering about 90 pages of extremely complex new measures. The provisions are problematic in many respects and we are not helped by the fact that there has been a massive lack of consultation, as my hon. Friend the Member for Arundel and South Downs (Mr. Flight) explained.
	The new rules are generally thought to be a sledgehammer to crack a nut and a compliance nightmare. One specialist noted that generalist advisers, let alone their taxpayer clients, will not know when to make their elections under paragraph 431. They will not know how to operate the regime or how to comply with it on every possible occasion that a chargeable event arises. How they were to do that was, he said, beyond him. Even if they managed to comply with the regime, the shares valuation division would be inundated with applications to agree hypothetical values of securities, with and without their restrictions, in order to calculate the amount of schedule E tax charged on each chargeable event.
	The new regime imposes income tax on the acquisition of securities and/or on their value at the time of defined chargeable events, where such securities are made available by reason of any person's employment. That applies irrespective of who acquires and provides the securities.
	I have a few basic points to make about the regime. First, income tax charges can arise for an employee at various stages in the life cycle of a security, on what is, of course, purely a paper value. Secondly, there will not always be a corresponding corporation tax deduction for the employer company because there are many mismatches with the corporation tax regime under schedule 23. I am sure that we shall look into that point in greater detail in the Standing Committee. I understand from representatives of the venture capital industry that the measure will be extremely hard on private equity investee companies, as they are often under the control of their investing limited partnership funds and thus cannot enjoy the tax advantages of things such as EMI—executive management incentive—options, nor will they be able to receive corporation tax deductions.
	Thirdly, the regime will render the employer company liable to account for the income tax under PAYE, which was originally done under a withholding system. Finally, it will require the employer to account for employer national insurance. All those cases apply even where a person other than an employer provides securities to a person other than the employee. All that makes this proposal extremely draconian.
	Proposed new section 421B(3) says that anything provided by a person's employer or by a person connected with the employer will be deemed to be made available by reason of employment, unless the provider of the security is an individual—for example, another shareholder. It also says that the right or opportunity arises
	"in the normal course of domestic, family or personal relationships of that person."
	That wording is very strange; it appears to suggest that an opposite presumption exists where the provider of the security is not the employer or a person connected to the employer, or where the security is to be treated as not acquired by reason of employment. That is not clear, and an indication of where the Government are coming from would be helpful before we have to gather our thoughts later in Committee.
	The new regime will catch gifts of securities—those securities provided at a price less than their market value; those provided with future payment obligations attached; those provided whether or not at market value or acquisition price; those that attach restrictions on transfer or retention; those that are subject to forfeiture or are convertible; those with artificially depressed or enhanced value; or those that are disposable for more than market value. It will also catch securities options acquired by reason of employment. Some options seem to be caught twice, because the definition of security includes subscription warrants, so a subscription option is both a security and a securities option. Is the regime therefore trying to draw a distinction between subscription and purchase options? That is not clear, and it is absolutely vital that we have an idea from the Minister about that before we go into the details later in Committee.
	Most importantly, can the employer and employee elect under the main part of the new regime—chapter 2, which relates to the restriction of forfeitable shares—to be taxed on the initial acquisition of the securities, valued for tax purposes on a basis that ignores the restrictions on those securities? If so, the subsequent chargeable events tax charges will not arise. However, if people do not elect, income tax charges will be made at various stages in the life cycle of the security, depending on what happens to it. Why not instead say that the profits on the ultimate disposal of the security will be taxed as income under schedule E, unless people elect for upfront income tax treatment to be the cost of entry to the capital gains tax regime, instead of trying to tax the security at lots of different stages in its life cycle? Of course there is no corresponding relief for a fall in value following a chargeable event.
	As my hon. Friend the Member for Arundel and South Downs said earlier, 14 days is much too short a period in which to have to elect for the reasons that he gave, which I will not repeat. Significantly for the private equity industry, which seems to be extremely concerned by these proposals, it would appear that the receipt of a carried interest in a venture capital or limited partnership would fall within the new rules. However, that needs clarification, as it is not clear whether the security interest that the employer acquires is the limited partnership interest itself, as with a unit in a collective scheme, because there is no definition of unit in the legislation, or whether the shares and securities that the partnership acquires in its investee companies count as the employee's securities, and whether, if the latter is the case, they acquire that interest qua partner or qua employee, deriving from their initial acquisition of a carried interest qua employee.
	By making an election, it may be possible to opt for income tax treatment at the outset, so that capital gains treatment for the future is secured, but if the electing needs to be done every time the fund makes an investment, that will be an administrative nightmare, and it will be impossible because, with a fund of funds, carry holders in the top fund will not even know what acquisition funds the lower funds are making. It is illogical that the employer and employee can agree that the employee will bear the employer's national insurance costs in the case of securities options, but not in that of other security interests.
	Those regimes, when enacted, will generally apply to securities acquired on and after 16 April 2003. Again, in the context of partnerships, it is not clear what is the date of acquisition of the security interest, as that depends on whether it is the partnership interest or the underlying shares or securities in investee companies that count. The definition of collective investment scheme is much too nebulous and unclear. The extension to the definition of readily convertible asset in paragraph 15, which in turn triggers national insurance and PAYE liabilities, is also of concern to the private equity industry, because the widened definition catches shares in a company that is under the control of another company, and limited partnership funds, investee companies, are often caught by that control test. That, of course, gives the employer company a national insurance liability. It also denies it a corporation tax deduction under the schedule 23 regime, and denies it the ability to adopt an enterprise management incentive option scheme, as I mentioned previously. That, of course, is a triple whammy to an industry sector that the Government have said previously they are keen to support, although they may not have intended it to have that effect, in which case I would be interested to hear the Paymaster General's views.
	All the people to whom I have spoken about this clause have said that more time is needed for consultation to get it right and to strike the right balance between anti-avoidance measures—which, of course, the Government wish to implement—and the serious impact that those measures will have on the mid-market private sector and the private equity industry too.

Dawn Primarolo: This has been a short but none the less important introductory debate to clause 139 and the associated schedule, which we will consider in the Standing Committee. In responding to the amendment and explaining the clause, I will address the issues raised, notwithstanding the fact that, clearly, there will be an interesting and detailed debate when the Bill moves upstairs to a Standing Committee.
	For the sake of absolute clarity, I urge the Committee to resist the amendment, and I commend clause 139, which introduces the reforms to the taxation of share-based remuneration. As the debate proceeded on clause 138, I stressed, and the Committee accepted, that the majority of employers and employees undertake their responsibilities in this area diligently. Unfortunately, however, a small though significant group persists in seeking out ways of avoiding those responsibilities. We have evidence that, in the most recent year for which data are available, at least £1.4 billion has been put through avoidance schemes using shares and securities to take advantage of the fact that the existing rules do not operate consistently and coherently in every situation.
	The anti-avoidance measures relating to employee benefit trusts announced in the Chancellor's pre-Budget report address much of that, but they cannot tackle every scheme: for instance, schemes in which the tax and national insurance saving is worth more than the associated corporation tax deduction for the employer.

John Burnett: Will the Paymaster General give way?

Dawn Primarolo: If the hon. Gentleman would let me make my opening remarks and respond to the questions that have already been put to me, I will be happy to take an intervention. This is a complex set of issues, on which I must concentrate as I respond to the Committee.
	The scale of the avoidance that uses share schemes in one form or another, which the measures in schedules 21 and 22 tackle, costs the Government—the taxpayer—in excess of £110 million a year. That is not insignificant. Although I recognise what hon. Members say about the representations that they have received from various bodies, I counter that—perhaps this demonstrates the complexity and importance of the subject—by referring them to the article, which I quoted earlier, in this week's "Tax Journal" by David Cohen of Norton Rose who is an expert in such matters. He details each substantive change that we are making and explains why they are better in some instances and clearer in others.
	Obviously the Government do not want to send out the message to the majority of employees and employers who are paying their fair share of tax that we are allowing highly paid executives to avoid their tax liability with complete disdain, which would be the result of the amendment. I make no apologies—I am sure hon. Members would not expect me to—for focusing on the changes that the clause introduces to tackle avoidance and to close loopholes; nor do I apologise for the comprehensive redesign of the rules, which will produce a system that is consistent, coherent and fair. A system that meets those criteria will be less open to abuse by a minority of predominantly highly paid employees who are intent on paying less than their fair share of tax and national insurance.
	The main focus of clause 139 is on tackling avoidance. As hon. Members know, that means that consultation is not appropriate. That is the practice not just of this Government but of the previous Government when trying to deal with such issues. However, in redesigning the rules we have drawn heavily on the feedback from consultation processes that have accompanied a number of discussions with the industry. We have also taken into account the industry's concerns, expressed to us over a long period of time, about the inequities in the current system and its proposals for making the rules fairer so that we design a new system that taxes to income only the value received from the employment at the time when that value becomes accessible and not the capital growth in the value of the share following acquisition, which is the current arrangement.
	I assure hon. Members that those anti-avoidance provisions are targeted at non-commercial transactions that place such benefits in the hands of employees without them paying their fair share of tax and national insurance on the value. They will not adversely affect those who offer their employees genuine share schemes that provide a real stake in the businesses for which they work. However, I accept that hon. Members will want to explore that in more detail upstairs in the Standing Committee.
	If we delay implementing the clause we will not only give a green light to such people to continue to exploit the loopholes in the legislation, but provide a sign-posted road map for everyone else as well. It would be an utter disaster. Hon. Members should be in no doubt that a large coach and horses would be driven along the roads identified in the attempts to change and stop the anti-avoidance, to the detriment of the Exchequer—the taxpayer—for the benefit of a few.
	Our concerns are real. In the space of just last week, Inland Revenue officials received interesting telephone calls from accountants. It seems that the saying for accountants is similar to that for lawyers: the number of opinions required dictates how many different accountants one needs to speak to. One accountant admitted that the existing avoidance schemes would be stopped by the proposals. Another admitted that a new scheme under development would be similarly frustrated, and yet another admitted that if only he had known about the loopholes, he would have had a field day making sure that his clients had access to tax and national insurance relief. To demonstrate our determination not to disadvantage people operating genuine share schemes, I have listened to representations on schedule 22, and I intend to introduce amendments in Standing Committee to correct an error in proposed section 446F(2)(b) of the Income Tax (Earnings and Pensions) Act 2003 and replace "16 April 2002" with "16 April 2003". That is a simple printing error which uncorrected would have resulted in unintended retrospection. In that respect, I agree with the hon. Member for Arundel and South Downs (Mr. Flight). Unfortunately, typographical errors sometimes occur.
	We wish to correct two drafting errors and ensure that appropriate relief is given when arriving at the taxable amount in relation to restricted securities, a point made by the hon. Member for Huntingdon (Mr. Djanogly). We also wish to extend the facility to allow people all the tax upfront on restricted securities awarded in the period between 16 April 2003 and an appointed date. I give hon. Members warning that I shall also table amendments to close the remaining avoidance opportunities that have been drawn to our attention. We will tighten the definition of convertible securities following representations that certain avoidance opportunities may remain if that is not done, putting beyond doubt the fact that PAYE must be operated on all charges to tax arising from the operation of these new provisions.
	At a time when we are asking everyone to make a greater contribution to the UK's need for investment in the public service through national insurance contributions it is important that everyone, including businesses, should pay their fair share of tax and national insurance. As I have already said, people operating genuine share schemes have nothing to fear from the changes.
	I shall now respond to points that I have not covered in my explanation of the amendments that I shall table in Committee. I believe that the question from the hon. Member for Arundel and South Downs about retrospection referred specifically to 16 April 2002, so I hope that he accepts that the correction to 2003 deals with that. Several hon. Members suggested that the provision was a sledgehammer to crack a nut, but I have demonstrated to the Committee that a large amount of money is being taken by a small number of people.

John Burnett: rose—

Dawn Primarolo: Perhaps I should explain why the provision is not a sledgehammer to crack a nut before the hon. Gentleman intervenes.
	Share-based remuneration takes many forms, and is used in many different ways. That reflects commercial reality, and the tax rules try to reflect that. However, the cost of avoidance is substantial. A significant sum is involved, and we have no reason to believe that it would reduce over time. The avoidance rules are carefully targeted on those carrying out non-commercial transactions designed to manipulate the value of shares with a view to avoiding tax and national insurance. Companies across a wide spectrum of business are using those schemes—the larger ones to shelter annual cash bonuses, the smaller ones to shelter the owner-director's remuneration. The chairman of the share scheme lawyers group, writing in The Tax Journal on Monday, had no difficulty grasping and explaining succinctly in just two pages what we were attempting to do. As always, I have listened carefully to the points that Members have made in debate, and shall reflect on them, but I must remind them that we will not be deflected from dealing with anti-avoidance.

John Burnett: I think the Paymaster General told the Committee that about £1.4 billion was the tax lost.

Dawn Primarolo: No—the value through the scheme.

John Burnett: The right hon. Lady said that about £110 million a year was lost. How long has that been going on, and how have the Government quantified the loss?

Dawn Primarolo: I am not sure that I can answer the question as to how long. The issue is when tax avoidance schemes become apparent to tax inspectors, as opposed to when they start operating. That is not always immediately clear. I shall check, and if there is a more suitable answer, I shall make sure that it is passed to the hon. Gentleman. With reference to the £110 million loss, I said that in the past year or so we have seen a growth in this area, but we have been aware of the inconsistencies for some time and we have been moving to correct them. As the hon. Gentleman well knows from his substantial experience, it is a complex area and one should not legislate in haste. We have tried not to do that.

Norman Lamb: Will the Paymaster General respond specifically to the concerns about the complexity of the provisions, so soon after the tax rewrite Bill was considered in this place? It seems extraordinary that the language used is not consistent and that, after a good initiative from the Government, we are now moving in the wrong direction.

Dawn Primarolo: The Bill is in the tax law rewrite style. That is why the measure has been taken out in its entirety and put back in. The total number of pages incorporating the necessary changes to deal with avoidance has increased the Bill by 10 pages—if that figure is wrong, I shall correct it in writing to the hon. Gentleman: that is, 10 pages to protect £110 million and produce fairness.
	The hon. Gentleman is right: I am utterly committed to the tax law rewrite project and as a Minister I have given it a great deal of support. Its job is to rewrite existing provisions, not to take decisions about the policy or make improvements. Imperfect as that is, I considered it inappropriate to hold up the tax law rewrite project in order to get the provision in place. This area and another area of the Bill closely follow the tax law rewrite style. We can all agree that that is the way forward.
	On changes to the taxation of convertible shares, the existing rules do not operate fairly to ensure that the right amount of value is taxed when the employee unlocks access to it. We have received representations about this unfairness. The new rules are fairer, taking into account the security acquired and the right to convert at a later date, and treating each of those separately to calculate the tax charged. There are examples where that is of considerable importance.
	There was a question—I do not remember who from—about interaction with enterprise SMEs. We are not attacking genuine share schemes that give employees a real stake. It is the Government's policy to make sure that we do not do that. We are attacking the exploitation of rules by those who do not use the rules properly. Small companies that want to improve their productivity through employee initiatives can benefit from tax and national insurance advantages by using Inland Revenue tax-advantaged arrangements, particularly the enterprise management scheme. The hon. Member for Huntingdon raised that with regard to its interaction with other areas of the tax system, and stressed that we should ensure that there were no adverse effects that would damage provisions elsewhere in the system. I agree. We will discuss the impact of the new rules, particularly in the context of venture capital, with the British Venture Capital Association. We will be mindful across the piece to ensure that there is no inadvertent knock-on effect.
	The hon. Member for Huntingdon also asked whether there would be guidance. The answer is yes. We want to ensure that the current guidance is updated. In particular, we want to work with the industry to ensure that it is appropriate. It is one thing to write guidance, but another to ensure that it is acceptable and usable by the industry.
	We are studying carefully the representations made by such august bodies as the Law Society. So far, none of them suggests that the fundamental concept and approach of the changes is flawed. Many proposals appear—I am sure that this is unintentional—to weaken the anti-avoidance effects and not deal with the structures involved.
	I realise that I may have spoken for longer than I should, but I hope I have made it clear why the Government consider absolutely inappropriate an amendment that seeks to delay implementation. That is why I ask my hon. Friends to oppose it, as it is foolish to give, in such a spectacular way, a road map on how not to pay tax. I hope that I have dealt with many of the points that have been made, although I appreciate that I have not mentioned all of them.
	In recommending the clause to the Committee, I look forward to the discussions in the Standing Committee, which I am sure will be interesting and detailed and will enable us to deal with many more issues so as to put people's minds at rest.

Howard Flight: I thank the Paymaster General for her response. In particular, I thank her for some of the corrections that she mentioned, including those about the date and the question of representation and retrospection. I am also glad to note that the Government are now studying the submissions of the Law Society. I trust that they are also considering representations made by the Institute of Chartered Accountants and other professional bodies.
	The clause, as it is currently drafted, smacks of legislation made in haste. As it stands, there is potential for a number of unintended consequences. In particular, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) pointed out, the issue of private equity and venture capital is crucial. Unfortunately, development in that area is already stalling pretty seriously in this country.
	I do not accept that there has been no scope for consultation on such a major issue. Indeed, the Paymaster General is effectively accepting a degree of consultation with the Law Society. The Government have been seeking to close down avoidance and that seems a clear and straightforward objective. The concern is that, because they have not consulted professionals about where they want to go and the unintended consequences that they want to avoid, we have ended up with legislation that is exceedingly complicated for lawyers, let alone those who have to obey it.
	We therefore feel that our amendment is appropriate. As the Paymaster General said, there will be a full debate in Standing Committee and many of the issues will be discussed. However, we are not yet in a society that is so totalitarian that it is right suddenly to introduce such massive and complex legislation with very modest flagging up in the Budget or previously. Furthermore, the new rules are not only about anti-avoidance. We therefore intend to press the amendment to a Division.

Question put, That the amendment be made:—
	The Committee divided: Ayes 172, Noes 289.

Question accordingly negatived.
	Clause 139 ordered to stand part of the Bill.

Clause 148
	 — 
	Non-Resident Companies: Basis of Charge to Corporation Tax

Howard Flight: I beg to move amendment No. 66.

Alan Haselhurst: With this it will be convenient to discuss amendment No. 67.

Howard Flight: The two amendments to which I am about to speak should be viewed in the context of some of the wider issues associated with clause 148, and I hope that the House will grant me indulgence if, rather than making certain points twice, I speak more widely around the amendments at this stage of our discussions.
	Clause 148 was foreshadowed in last year's Budget and the Government's proposals were summarised in a subsequent press release that stated that the new proposals were
	"aimed at modernising the UK tax regime by eliminating a weakness in the existing rules, and so bringing the UK more into line with other major industrialised countries, such as France, Germany and the USA".
	That was essentially because
	"recent work by the OECD . . . highlighted the fact that the UK was out of step with other major countries, and the changes here . . . make the UK approach similar to that seen elsewhere".
	The press release stated that the changes would apply to accounting periods commencing on or after 1 January this year. Clause 148 gives effect to those proposals, although, curiously, clause 147, which defines the term "permanent establishment", contains no commencement provision and so will take effect from Royal Assent. I am not clear whether clause 148 can take effect from 1 January as the crucial definition will not have been enacted at that point.
	Amendment No. 66 deals with the issue of the permanent establishment having the same credit rating as a non-resident company. Ratings are given to companies, to corporate debt and sometimes to specific transactions, and it is not clear what is being referred to here. Only a few companies that carry on business in the UK through a permanent establishment will have a credit rating. It is surely not appropriate to treat a UK permanent establishment, which might carry on only one or a limited range of the activities carried on by the company itself, as having the same credit rating as the company as a whole.
	Both the OECD model and the draft legislation attribute to the permanent establishment the profits that would have been realised by a separate enterprise carrying on the same or similar activities. If any rating were to be assumed, it should be that which the assumed separate enterprise would have to have had, having regard to the activities that it carries on. It is illogical to assume a credit rating equivalent to that of the company itself.
	The term "shareholders' loan" is also an issue. Given that "loan" has a meaning that does not include unpaid purchase money, a definition would be required if, contrary to what we feel is appropriate, the provision is to be retained. Failing that, debt securities issued as a consideration for an acquisition would not be included.
	The explanatory notes to the Bill refer to equity capital and loan capital. That would probably be acceptable for financial institutions where there is a substantial amount of guidance, but for other companies it would be difficult to work out what is meant by the term.
	Subsection (5) also permits the Revenue to make regulations for the application of subsection (2) to insurance companies, including the attribution of capital to a UK permanent establishment. That confers an unacceptable degree of power on the Revenue.
	We are also concerned that the terms of the accompanying schedule 25 are discriminatory. The effect of paragraph 5 is that a permanent establishment would be in a worse position than a subsidiary that borrowed from its parent company. That could make organisations think more carefully about whether to set up in the UK as a branch or subsidiary. To be able to deduct interest would require the permanent establishment to have its own credit rating and deal at arm's length with other parts of the organisation. It could be discriminatory if the branch were not treated in the same way as a subsidiary.
	The commentary in the OECD model is a flexible document and there is an ongoing debate about whether a branch should be treated as independent. There is a risk that, if the commentary is changed, the UK provision will then be out of line. If provisions are included in the Bill based on the current version of the commentary, there is a risk that that will restrict the Revenue's flexibility.
	The clause is not specifically about European issues, but it is based on the long-standing principle of the UK's "territorial" basis of taxation for overseas companies, so it indirectly allows European issues to be raised; it focuses on European issues. Indeed, some of the commentary on the proposals from professionals has suggested that it contravenes EC treaties.
	The premise from which the clause proceeds is that British companies should be taxed on all their profits, wherever they arise, and that non-UK companies should be taxed on their UK profits. In both cases, the tax yield is protected by a number of rules that prevent assets or profits from being siphoned out of the UK through transfer pricing, tax-free transfers of assets or excessive interest payment. The UK tax base is also protected by allowing offset of losses only where those have arisen in the UK.
	The Paymaster General will be aware that a number of recent decisions have challenged some fundamental aspects of the corporate tax system of EU countries and our own corporate tax system. Indeed, they could challenge clause 148 and its accompanying schedule. The challenges seek to argue that the application of different tax rules to transactions with foreign companies from the rules that apply domestically is unlawful discrimination, but from a domestic perspective such discrimination is necessary and has been practised to ensure that companies do not simply siphon off profits to low-tax countries.
	Those challenges are a significant threat to the UK's ability both to control its tax borders and to exercise its own corporate tax policies. For example, it may be unlawful to restrict interest deductions to EU companies where those payments represent excessive deductions designed to shift profits overseas. That is raised in the German Lankhorst case and the awaited Dutch Bosal case. It may be illegal to apply transfer pricing rules to transactions within EU companies, an issue that has not yet been litigated but which follows in principle from other European Court of Justice decisions. The UK may need to allow tax-free transfers of assets to EU companies because they are permitted between UK companies. The controlled foreign companies rules that prevent British companies from accumulating tax-free cash outside the UK may be unlawful. Again, that issue has not yet been litigated but there are relevant French cases. The well known Marks and Spencer case currently being litigated would require Britain to allow losses of foreign subsidiaries against UK profits. The recent decision in the Lankhorst case may well undermine the usefulness and effectiveness of the clause as interest payments to other EU members of a group would still be deductible.
	The Government have to date refused to discuss—indeed, the Revenue appears to have buried its head in the sand—the impact of European Court of Justice decisions on the UK tax system. We welcome the announcement in the Red Book that that issue will be looked into, but it is the first acknowledgment that a major problem exists.
	I would like in that context to make the following key points to the Paymaster General. The first is about whether the Government are confident of the forecast yield from clause 148, particularly in light of the slowdown in the financial services industry in the City as well as the EU issues. Secondly, the European Court's decisions have made provisions that are designed to prevent abuse of domestic tax rules unlawful. That challenges the UK's ability to protect its corporate revenues. What are the Government doing to defend the UK's tax rights over UK and non-UK companies operating in the UK?
	The Government's failure to face up to the problem so far leaves them with only two—potentially unattractive—options. They can extend the rules that are designed to apply only to international transactions to cover all domestic businesses, which would be highly regulatory and would impose unnecessary compliance costs on UK businesses. Alternatively, they can abandon the rules that prevent international tax avoidance, which would mean the loss of significant tax revenues.
	How do the Government propose to balance the need to raise revenue with the competitiveness of our tax system? The Red Book suggests that they are more concerned with protecting the tax yield than with the all-important issue of competitiveness. They have, at least overtly, ignored all the warning signs that sovereignty is being undermined in this crucial tax area, and are now acting in a way that will have an adverse effect on British business interests and the vital attractiveness of Britain as an international business location.
	Will the Government consider tabling an amendment to the European treaty as part of the 2004 intergovernmental conference, to ensure that specified tax rules designed to prevent international tax avoidance are agreed not to be unlawful, so that we can retain national sovereignty in these areas and, indeed, ensure that what is proposed in clause 148 is effective?

John Baron: Clause 148 could, I think, cause serious problems for the City of London and therefore for the country as a whole, as the City is a major contributor to our economic well-being. The clause alters the tax treatment of UK branches of non-UK companies, which will have a particularly adverse effect on overseas banks operating in the City. It could seriously jeopardise the City's position as the world's leading international financial and business centre, as foreign banks downsize their operations in London.
	Let me say a little about the importance of the City to the kingdom as a whole. It is no exaggeration to say that it is a global powerhouse at the heart of the UK's financial services, a sector whose net contribution to the UK's current account has been over £13 billion, a significant amount of which has been generated within the square mile. There is a daily foreign exchange turnover of over $500 billion in London, and 56 per cent. of the global foreign equity market and 70 per cent. of eurobonds are traded there. London is the world's leading market for international insurers: the worldwide premium income reached £157 billion in 2001 alone.
	I must declare an interest. I was a fund manager before entering the House, which enables me to testify to the importance of foreign banks to the City's prosperity and wealth generation. About 500 foreign banks currently operate in London, employing some 60,000 people. They contribute enormously to the City's pre-eminent financial position. I believe that this tax change will threaten that position, because it has been built on a false premise by a Government who misunderstand the way in which the City works—and, I suggest, misunderstand the economic facts of life. The Chancellor tries to justify this move by claiming that such changes in the tax treatment of foreign companies simply bring us into line with the US and with other European countries. However, he misses the point that this country's existing favourable tax treatment helps to compensate foreign companies for other factors that make doing business in London, in particular, less attractive when compared with other cities.
	One example is the capital's transport infrastructure, which is a mess. Average journey times have increased by about 16 per cent. since 1998, and motorway congestion is up by 250 per cent. since 1997. Meanwhile, congestion charging has added a further marginal cost to businesses operating in London. At the same time, train punctuality has worsened each year under this Government. By withdrawing the advantage of a low-tax regime, they have made the decision whether to locate to London or elsewhere a more finely balanced one for foreign companies. This Government fail to understand that when it comes to the City, increasing mobility of labour and modern technology mean that business undertaken in the London branches of foreign banks can easily be done elsewhere.
	Ian Mullen, chief executive of the British Bankers Association, said of the tax change last year, when it was first mooted:
	"This will massively increase the costs of foreign banks operating in the UK and have an adverse impact on jobs and the competitiveness of the City".
	In a letter to the Financial Times last year, Angus MacLennan, chairman of the Foreign Banks and Securities Houses Association, said that he guarantees that this tax change will result in business going abroad—in the first instance, by way of assets being moved to reduce additional tax, and afterwards as income follows the assets. He said:
	"the reduced revenue base and increasing costs of being in London (compare these with the US, France or Germany . . .) will lead many to conclude that, economically, they should not be here at all".
	He concluded his letter by saying:
	"This is the reality. Short-term gain and long-term destruction of the best industry in the UK. Our competitor countries must be laughing with anticipation".

John Bercow: Does my hon. Friend agree that Ministers are especially short-sighted in this matter, given that they know, as we do, that this country has already sacrificed two thirds of its competitive tax advantage since 1997, relative to other members of the European Union?

John Baron: I readily agree with those figures and that sentiment. What worries Conservative Members is that this country's competitiveness appears to be being continually eroded by these tax increases and regulations. Independent statistics suggest that we are slipping down the competitiveness league tables, which is causing a loss in productivity that will eventually result in the loss of our pre-eminent economic place.
	It is true that these measures will generate income for the Treasury over the short term. Estimates vary, but it is suggested that some £350 million will be generated in the first year, with perhaps another £650 million being generated in 2004–05. However, as my hon. Friend the Member for Buckingham (Mr. Bercow) has just suggested, they will prove to be among the many tax measures that raise money in the short term but lead to a loss of revenue to the Treasury in the longer term—a loss that will far exceed any short-term gain, as foreign banks and employees quietly move out of London.
	This issue is important to the country as a whole. By attacking the jewel in the UK industry's crown, the Chancellor is eating away at our competitiveness and longer-term prosperity. I urge the Government to reconsider their position, because, as sure as night follows day, the tax increase will result in a loss of prosperity and revenue in the longer term to the detriment of us all.

Dawn Primarolo: The central issue at stake in clause 148 and its supporting schedule—the amendments are designed to attack and eradicate it—is whether it is fair that foreign banks operating in the City of London, which are competing with UK banks, should, on account of their structure, pay little or no corporation tax. Is it fair for UK banks to compete for business against foreign branches that pay no tax? That is the central issue.

John Baron: rose—

Dawn Primarolo: I am not posing a question for the hon. Gentleman to answer, but opening my case on the clause and the amendments. I shall urge the Committee to reject the amendments, comment on the key aspects of the clause and respond briefly to the hon. Member for Arundel and South Downs (Mr. Flight), who posed wider issues about the European Court of Justice, though I realise that that is strictly outside the remit of the amendments and I shall try to remain in order.
	The amendments would remove the main charge introduced by clauses 147 to 155 and by schedules 25 to 27. The charge remedies what I would politely call a weakness in UK domestic law and ensures that UK branches of foreign companies will pay a fair share of UK corporation tax, reflecting the profits that they make from their UK activities. The bulk of clause 148 and schedule 25 set out in UK law the rules that the UK applies in taxing foreign companies. They also modernise the terminology used in UK law.
	The one truly new element of clause 148 is set out in new section 11AA(3), which changes the way in which the taxable profits of branches are measured. For the first time, consideration will have to be given, for tax purposes, to the amount of equity and loan capital that a branch would have at arm's length. That is, consideration will need to be given to the capital that the branch would have if it were a separate entity carrying on the same or similar activities under the same or similar conditions.
	Amendment No. 66 would remove that change. If it were accepted, the winners would be UK branches of foreign banks—it is primarily banks that operate through branches—which would continue to pay little or no corporation tax in the UK. The losers would be the UK Exchequer and UK incorporated banks that compete with foreign banks for their business.
	It might be helpful briefly to explain the deficiency in the old legislation. Previously, there was no requirement for a UK branch to have regard to the amount of capital that it would require commercially in order to support its business. That meant that a UK branch of an overseas bank could, for tax purposes, borrow every pound that it lent to customers, and the interest cost of that borrowing would significantly reduce the UK profit. In contrast, a UK bank would need to have equity capital and would not borrow every pound that it lent, so it would have a smaller deduction for interest expense. The result was that nine out of 10 of the top foreign bank branches in the UK were paying no corporation tax on their UK profits, despite their large and long-standing UK operations. 5.15 pm

John Baron: Will the Paymaster General give way?

Dawn Primarolo: No.
	Amendment No. 67 would remove the new provision in new section 11AA(5). That provision would give the Board of Inland Revenue the power to make regulations specifying how the new capital requirements are to apply to insurance companies. That will enable the new rules to be adapted for insurance companies, because their capital requirements are organised differently from those of banks and other companies.
	The hon. Member for Arundel and South Downs raised several issues, the first of which was the question of guarantee fees paid to head offices. The new legislation specifies that when computing the profits of a permanent establishment, it should be treated for tax purposes both as if it were a distinct and separate enterprise and as if it were trading in the same or similar activities under the same or similar conditions. That is based on the wording used in article 7 of the OECD model tax convention. There is an inevitable tension here, which arises from the fact that a branch is clearly not the same as a subsidiary, and different economic and legal consequences arise from adopting one structure over another. If the permanent establishment is assumed to be acting under the same or similar conditions, that must logically apply to the actual cost at which it can raise funds. The cost at which it can raise funds will be dependent on the company's credit rating. While it is our view that the assumption of the same or similar conditions means that the permanent establishment must have the same credit rating as the rest of the company, that matter was specified in the legislation to provide clarity and put the matter beyond doubt.

John Burnett: Is the Paymaster General talking about the profits of the branch operating in the UK?

Dawn Primarolo: I am talking now about the ability of the branch in the UK to raise loan moneys at cheaper cost, because it has the credit rating of its parent company. The whole clause refers to the profits of branches raised specifically from their UK operation.

John Burnett: Is that described as "the rating" in the legislation?

Dawn Primarolo: Yes. We are seeking to ensure that the profits accumulated in the UK are correctly taxed within the UK net.
	The question of guarantee fees is complex and it should be noted that the assumption of the same credit rating is also in line with the current OECD view. If the UK were to take a different view on credit rating, it would be out of line with international consensus, which could lead to double taxation for the foreign branches of UK banks.
	Various representations have suggested that a permanent establishment should not be regarded as having the same credit rating as the company of which it is part and that guarantee fees should be allowed, but it is difficult to justify that both logically and legally. All parts of the same company will have the same credit rating. The permanent establishment will therefore have a certain actual cost of funding. It would be inconsistent with the arm's-length principle to treat the permanent establishment as funded at anything other than the actual rate at which it could borrow funds from third parties. Guarantee fees paid by one part of the same company to another will have no legal effect, and as the permanent establishment can access funds at a certain cost, it is difficult to see why it would pay such a fee.
	The hon. Member for Arundel and South Downs also raised the question of whether the proposals are incompatible with European law.

John Baron: Will the Paymaster General give way?

Dawn Primarolo: No.
	The aim of the legislation is not to treat branches and subsidiaries as though they were exactly the same. There are clear economic and legal consequences to adopting one or the other structure. Branches and subsidiaries are not the same, and we cannot pretend that they are. For instance, a branch is able to access the capital of the company as a whole to support its business, and that is why banks often choose to trade through branches. If a bank chose instead to trade as a bank in another country through a separate company, it would need to raise further capital to support the activities of that subsidiary, rather than being able to benefit from the capital and credit rating that it already held. The Bill will create a more level playing field between branches and subsidiaries, so that the way in which the profits of branches are computed reflects the commercial reality: that they have access to company capital to support their business. The Bill will mean that UK branches of foreign banks will now pay a fairer share of corporation tax. That does not mean that branches are being treated more harshly than subsidiaries.
	The new provisions require consideration of the amount of equity and loan capital that the branch would have at arm's length. The Bill adopts a capitalisation approach, which produces a more level playing field between the branches and subsidiaries of foreign banks, and so removes discrimination. That is entirely in line with current practice.

John Baron: Will the Minister give way?

Dawn Primarolo: No, I will not.
	The hon. Member for Arundel and South Downs asked why the terms "equity capital" and "loan capital" were not defined. The Inland Revenue saw no need for those terms to be defined in the Bill. Although some have commented that the terms should have been defined, other respondents have agreed that there was no need. The hon. Gentleman recognised that the terms are well established among the banks that form the main group of foreign companies affected by the changes made by the clause.
	I turn now to the issue of decisions with regard to European law, and to the points raised on that matter by the hon. Member for Arundel and South Downs.

John Baron: Will the Minister give way?

Dawn Primarolo: No. I want to continue to make my points.
	The Committee will no doubt be aware that there have been recent judgments in the European Court of Justice, and there are ongoing challenges under European law. The particular case to which the hon. Member for Arundel and South Downs referred was in fact a ruling against the German tax system, not the UK's. As a result, the Government are of course aware that some uncertainty may have developed.
	We accept that there is a need to restore certainty as quickly as possible. That point is reflected in the Red Book, in the proposals on corporation tax reforms and the next stage of consultation. The hon. Member for Arundel and South Downs will be well aware of the excellent relationships that have existed between this Government and interests in the City of London, especially in connection, for example, with matters arising from discussion of the draft directive on the taxation of savings. At every point, the Government have discussed—with business in general and with those sectors that have a specific interest in the matter—the developments that we want to secure. We want to ensure that we continue to have a corporation tax system and a general tax system that enhance the Government's objectives of establishing fair tax competition, increasing productivity and ensuring that the UK is the most competitive place to do business.

John Baron: Will the Minister give way?

Dawn Primarolo: No, I will not give way. The hon. Gentleman has stood up repeatedly, but I will not be giving way to him.
	This summer's forthcoming consultation on corporation tax reform will provide an opportunity for the Government to consult business on the legislative options to achieve our objectives of continuing to modernise and develop our tax system with regard to the objectives that I set out. We look forward to receiving input from the companies involved. It would be foolish in the extreme to speculate on what might be in the consultation document, and I am sure that the hon. Member for Arundel and South Downs does not seriously expect me to address those points, or to prejudge consultations with the very businesses with which we have worked so closely and in such detailed partnership.
	The final points related to whether the measure would damage the City of London. The Government's credentials for acting in the best interests of the City and for defending its competitive advantage cannot be challenged either in Parliament or in the City itself. Indeed, our credentials are not challenged: we continue to receive accolades from all concerned on our exemplary conduct of the debates.

John Baron: Will the right hon. Lady give way?

Dawn Primarolo: No, I will not give way.
	It is clearly not the case that the measure will drive foreign banks from the City of London. Those banks are there for good business reasons. The City is one of the world's premier locations for conducting business of that type. The banks are there because of the crucial networks and support systems. There is nothing to rival the City in the rest of the European Union, and foreign banks will continue to do business there, but they will do so on the same competitive basis as UK banks, which is entirely fair and correct.
	I ask the Committee to reject the amendments, and urge hon. Members to support the clause when we reach that point in today's business.

Howard Flight: There are two key points on which I want to put further questions to the Paymaster General. I also want to respond to her comments about the ingredients for the continuing prosperity of the City of London.
	I went into the first point at some length when I asked the Paymaster General whether the judgments of the European Court of Justice to date, and the principles on which they were based, pose an inherent threat to what clause 148 and schedule 25 seek to achieve. As I pointed out, the recent Lankhorst decision could undermine the clause, as interest payments to other EU members of a group would still be deemed to be deductible. If any EU banks or a significant number of foreign banks in the City of London are based in other EU countries, the whole issue of not allowing the charging of wider interest, which the clause is substantially about, could be undermined by the ECJ's principles and rulings.
	Secondly, although I acknowledge the fact that the Government have consulted widely, and in the main effectively, with the City on a number of issues and that, in fighting our patch with the EU, there has by and large been effective collaboration between the Government and enterprise, I passionately believe that it is a mistake to think that the continuing prosperity of the City relies purely on geography, networks and established talent. Having lived through 30 years of history, I have to point out to the Paymaster General that that prosperity always related fundamentally to tax.
	In 1970, the City of London was a dead duck. It was too large for the UK economy, and it came to life only when the then Labour Government agreed with the Governor of the Bank of England on what amounted to tax-free Euro-banking, which thus took off in London rather than in Zurich or any other location. There is a mixture: the City has to be competitive tax-wise and regulatory-wise, and it has to be attractive tax-wise and regulatory-wise, as well as using its inherent advantage of a pool of talented people. If the City becomes uncompetitive regulatory-wise or tax-wise, business will go to New York, Zurich and other places, as sure as eggs are eggs. We must thus consider how we tax overseas businesses in London in comparison with how they are taxed in New York, Zurich and so forth. As I said earlier, I am well aware that the provisions have been consulted on and that they appear broadly comparable to the arrangements in New York and other locations and therefore are not immediately a threat.
	Amendments Nos. 66 and 67 would not undermine those provisions; they would address the two little, specific issues to which I referred. We will not want to press the amendments to a vote, because they are not of fundamental importance, but I wish to tell the Paymaster General that, although the provision itself was done and dusted last year, certain things have changed, and in particular the way in which the ECJ has responded, which may render it inoperative. However, I beg to ask leave to withdraw the amendment.
	Amendment, by leave, withdrawn.
	Clause 148 ordered to stand part of the Bill.
	Schedule 5 agreed to.

Clause 184
	 — 
	Rate of Landfill Tax

Question proposed, That the clause stand part of the Bill.

Howard Flight: The Chancellor announced in his 1999 Budget that
	"To reduce the amount of waste going to landfill, the landfill tax, £10 per tonne in 1999, will in future rise by £1 per tonne per year."—[Official Report, 9 March 1999; Vol. 327, c. 182.]
	The increases made this year are the last under the £1 a tonne annual duty escalator. From 2005, the annual duty escalator will increase to £3 a tonne, with a view to reaching a rate of £35 a tonne in the medium to long term.
	The United Kingdom has one of the lowest levels of recycling in Europe, with only 11 per cent. of waste recycled—well below that of many European countries, some of which recycle as much as 40 per cent. of household waste. The Government have failed to provide a coherent strategy for sustainable waste management, and we have seen an ad hoc approach, with a tax increase here, a complicated and failing tax credit scheme there and, meanwhile, landfill usage is increasing.
	The Government have little hope of complying with the 1999 European landfill directive, under which the amount of biodegradable municipal waste going into landfill sites would be reduced to 75 per cent. of 1995 levels by 2006. The amount of municipal waste sent to landfill sites has increased from 21.9 million tonnes in 1999, to 22.1 million tonnes in 2000–01.
	The Environmental Audit Committee recently criticised the Government's strategy, saying:
	"The Waste Strategy 2000 is not so much a waste strategy but a strategy for complying with some of the requirement developed in the EU. Even with that interpretation, it has still not proved effective in delivery".
	I am afraid that the phrase, "not proven effective in delivery" is rather familiar in virtually all areas of this Government's activity.
	The last Conservative Government introduced the landfill tax in 1996—the first tax with an environmental purpose. We understand the need to encourage a comprehensive sustainable waste management system by promoting more recycling and less landfill. The long-term use of landfill is clearly unsustainable, and we believe that the Government should be more effective in promoting the alternatives.
	The response to this measure has been mixed. The Engineering Employers Federation commented:
	"The current rises in landfill tax are only acceptable if the funds raised are hypothecated directly into improving the waste management infrastructure".
	The CBI said that businesses "remain to be convinced" of the need to raise the tax by £3 per tonne per year. Can the Economic Secretary confirm that the £140 million increase in landfill tax revenue scheduled for 2005–06 will go towards promoting sustainable waste management and recycling programmes? Given that the rationale behind increasing landfill tax is to ensure that the UK complies with EU legislation, surely it is vital that that money goes towards increasing recycling and improving markets for recycled materials.
	The arguments against the landfill tax increase are that the increasing rate of tax could act as an incentive to move over to other forms of waste disposal, which end up being more damaging to the environment and in some cases illegal. The Environment, Transport and Regional Affairs Committee cited
	"two very good arguments for the landfill tax not being increased to a much higher level without other changes taking place".
	First, there is a danger that the use of incinerators may increase as landfill becomes a more expensive option, together with the problem of illegal fly tipping. How do the Government plan to avoid simply shifting the problem elsewhere and making things worse? Secondly, the increase in the tax will hit local authorities hardest. The Government's 2002 strategy unit publication, "Waste Not, Want Not" says:
	"Of the total revenue sourced from active waste, approximately 46 per cent. is paid by business and the remaining 54 per cent. by local authorities . . . Like business, a rise in landfill tax will provide local authorities with an incentive to fund alternative ways of managing waste disposal".
	My concern is that local authorities that cannot claim under the landfill tax credit scheme are struggling hard enough as it is. If the landfill tax trebles over the next eight years, matters will be made worse and the council tax driven still higher.
	Finally, the landfill tax credit scheme, which was introduced along with the tax in 1996 and enabled landfill sites to direct part of their landfill tax liability towards funding local environment projects in return for a tax credit, has encountered high administrative costs. Overall, the scheme was deemed to be a success, but the Public Accounts Committee report identified the following problems:
	"a lack of overall accountability . . . and a lack of transparency",
	as well as high overhead costs. Following that, the Government announced reforms in the November pre-Budget report, with the new scheme starting on 1 April, but many waste management groups have expressed concern about the new scheme. Two thirds of the money from the scheme—some £100 million—will go towards public spending to encourage sustainable waste management, but the remaining third will continue to go to local projects. I understand that local waste reduction and recycling campaigns have expressed concerns that they may lose out on funding under the new scheme.
	Do the Government remember the pledges that they made in "Waste Strategy 2000", proposing to use the landfill tax credit scheme to help deliver an increase in recycling, particularly of household waste? Are WasteAware and other such schemes not recycling projects? We would contend that "Waste Strategy 2000" is in a shambles. It has failed in its piecemeal approach to sustainable waste management. According to the European Environment Agency, to meet the requirements of the landfill directive alone, the UK must divert 27 million tonnes of biodegradable municipal waste away from landfill sites. The UK will therefore need to deliver the equivalent of one new management facility, capable of processing 40,000 tonnes of waste, per week, for the next 14 years.
	We have a huge problem, and the EU targets are unrealistic. Instead of working together towards the short-term goal of meeting those EU targets, the Government should embrace a long-term programme to promote recycling, the use of biodegradable materials and sustainable management systems. We would not rule out the use of economic instruments, but we remain unconvinced that increases in the landfill tax will create a sustainable waste policy and promote recycling programmes.
	Like most of the Government's environment policies, the tax stems from a panic to meet the targets laid down by Europe and from the primary motivation of raising revenue. I remind the Economic Secretary of the fridge mountains, the problem of abandoned cars and the disastrous climate change levy, all of which are a result of rushed and ill-thought-out legislation. They fail to take account of the bigger picture or to address the long-term environment issues and deliver the objectives that were claimed.
	We urge the Government to reconsider their policy. They should not base the tax increases on fiscal and short-term considerations, but consider them in the light of an effective long-term waste policy.

Simon Thomas: I support the clause. Despite pertinent points made by the hon. Member for Arundel and South Downs (Mr. Flight), I am not sure what Conservative policy is on waste minimisation, waste reduction and recycling. However, he was right that the landfill tax is one of the longest running pieces of environmental taxation in the UK. Its relevance to the waste mountain is important, so it is vital to spend a couple of minutes examining why we need a landfill tax, the rate at which it should be set and whether it will help us to meet the Government's aims and the wider European aims to which we have all subscribed.
	The landfill tax is one of the few taxes that businesses recently asked the Government to raise, and at a greater rate than proposed in the Bill. Although the hon. Member for Arundel and South Downs prayed in aid the CBI, the Economic Secretary will be aware that the waste companies wanted an accelerated increase in the economic drivers towards waste minimisation and a reduction in landfill in favour of recycling. In fact, they were a little disappointed that the Bill did not impose a greater level to reach the Government's eventual target of £35 per tonne for the landfill tax.
	Those companies see clearly that we will not meet our recycling obligations and our more important European obligations to reduce the amount of waste that we send to landfill without a much stronger driver in the economic market. I would have expected the Conservatives at least to be in favour of strong economic drivers, because that is how markets work. Sometimes it is necessary to regulate markets so that they take the right direction for the greater aims of the public good.
	I want the Economic Secretary to address some of the concerns of the Environmental Audit Committee, on which I serve and which recently produced a report on waste. As the hon. Member for Arundel and South Downs rightly reminded the House, that report makes it clear that the Committee thinks that the Government's approach is a knee-jerk reaction to the demands of the European Union. We did not think that their approach was anti-European. The reality is that the Government reacted to demands for which they had not properly prepared. They had not properly engaged with the EU legislation and had not thought through how it would work domestically. As a result, they have been forced to rely on a landfill tax and very little else to achieve their waste minimisation and recycling aims.
	In that context, we have the unhappy news from MEPs who have served on the European Parliament's environment committee that the Government are already missing their EU targets and will fail miserably in implementing EU legislation. I hope that the Economic Secretary can give us assurances tonight that that will not happen and that the landfill tax, increasing at a set rate of progression, will achieve the aims of the 2000 waste strategy throughout the United Kingdom, not just England. The obligation to represent the UK in negotiations on EU targets involves not just Westminster but the devolved Administrations.
	Finally, to emphasise the point made by the hon. Member for Arundel and South Downs, the landfill tax may encourage less sustainable methods of waste disposal, and I am particularly concerned that there may be an increase in incineration. That is no reason to argue against the landfill tax. Indeed, it is a reason to argue for an incineration tax or the correct regulation of incineration to ensure that such an increase does not happen. However, I am concerned that we may rely on a single economic instrument that is not designed to encourage recycling or waste minimisation but to stop waste going into landfill. Are we sure that the market and people responsible for the disposal of waste will make the necessary jump?
	We cannot dispose of things in landfill and cannot go ahead with the co-disposal of hazardous waste in landfill, but have we ensured that local authorities and waste disposal companies will take the opportunity to achieve waste reduction, minimisation and recycling? Have we ensured that the landfill tax will prevent the use of other methods of disposal such as incineration? That is not yet clear in the Government's approach to the issue. An economic driver such as the landfill tax is undoubtedly the correct approach, but the Government have not yet thought through its impact on the market—it is a suck-it-and-see approach. I am concerned that many local authorities are already missing their recycling targets, as has been admitted in evidence to the Environmental Audit Committee. We would be in an even worse position if we missed the target set by the European Union. I hope that the Economic Secretary can give guarantees that the Bill will bring about what other areas of government aim to achieve—greater use of recycling, less waste going to landfill and a reduction in the waste produced in the first place.

George Osborne: As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) pointed out, clause 184 points the way to substantial increases in the landfill tax. The clause proposes that it should increase by £1 this year, £1 next year and, from 2005–06, by £3 a year so that, according to the Government, it will be levied at £35 a tonne. That is a substantial increase on the original tax introduced by the Conservative Government in 1996, which was just £3 a tonne. Before the clause passes into law, we should reflect on the original assumptions behind the decisions made by the then Chancellor, my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), when introducing the tax.
	The first assumption was that the landfill tax would be offset by a compensatory reduction in employers' national insurance. Indeed, in his 1994 Budget, my right hon. and learned Friend said:
	"I am determined not to impose additional costs on businesses overall . . . I want to raise tax on polluters to make further cuts in the tax on jobs."—[Official Report, 29 November 1994; Vol. 250, c. 1098.]
	There is a striking contrast with this year's Budget. Instead of a compensatory reduction in employers' national insurance, there are substantial increases. The hon. Member for Ceredigion (Mr. Thomas) did not give the landfill tax the credit that it is due. It is not just one of the oldest environmental taxes, it was the first tax with an explicit environmental purpose. The assumption—pretty radical at the time—was that a landfill operator could offset any contributions that it made to an environmental charity or voluntary group against its liability for landfill tax up to a specified limit. Indeed, it could claim tax credits for 90 per cent. of its contributions to charities and voluntary groups up to a total of 20 per cent. of its overall landfill tax bill in any one year. The nature of those environmental bodies was spelt out—they were non-profit-making bodies, they were not controlled by central or local government and they were often local schemes. They were administered by Entrust, a central Government regulator.
	Since landfill tax was introduced and the landfill tax credit scheme came into operation, more than £400 million has been contributed to environmental bodies, including, in 2000–01, the most recent figures that I have seen, £109 million to those charities. Substantial sums have been given to very small local groups, which has been a huge boon to such groups and charities. It has enabled them to be set up and has done an enormous amount of good locally in, I would guess, every constituency.
	There is a philosophical point here. This is about strengthening civil society. It is about Burke's "little platoons", and about supporting voluntary groups, local charities and so on. As a member of the Public Accounts Committee, I am the first to accept that there have been problems with the scheme. The Committee looked into the matter, and I have its report. There were problems with the lack of oversight, accountability, transparency and so on. It is all spelt out in the Committee's report. However, the problems lay with the Government, the regulator and the way in which the scheme operated, not with the principle of the scheme. That is why I am sad that, instead of trying to fix the problems and stick with the principle, the Government have largely decided to abandon the principle altogether. That is a tragedy, not least because the Government recognised in their pre-Budget report what a good thing the scheme has been. The report stated:
	"The Government recognises that the Landfill Tax Credit Scheme (LTCS) has supported many worthwhile community and environment projects that have improved the quality of the environment at the local level . . . The scheme has also been successful in generating local community involvement in such projects."
	If we are not here to support such schemes, what are we here for? As I said, it is sad that the Government are largely abandoning the scheme.
	That has caused enormous concern in groups in my constituency and in constituencies across the country. The Economic Secretary is proposing, in effect, to remove two thirds of the funding of the scheme—funding raised directly by clause 184—and to put that money into general public expenditure, although he says that it will be hypothecated to environmental management and so on within centrally managed expenditure. Nevertheless, £60 million or more, which is currently given to the charitable and voluntary groups, will go straight into the Treasury coffers.
	When I wrote to the Minister about the matter, as no doubt did other right hon. and hon. Members, he replied on 22 January and, I think, gave the game away. He wrote:
	"This change reflects the Government's conclusion that public spending will be a more effective way of providing strategic direction to sustainable waste management."
	That tells us all we need to know about the Government. They think that Whitehall knows best. They think that their public spending is a more effective way of delivering change on the ground.
	The charities and environmental groups that have written to me do not accept that, nor do the groups that will lose out most—those involved in activities such as research, development, education and information, all of which are vital, as the hon. Member for Ceredigion said, to a change in attitude in our country towards these issues.
	I shall briefly further detain the House, although I know that the nationalists are keen to get on to their whisky clauses. Waste Watch has written to me and probably to many hon. Members. It runs the Cheshire Schools Waste Action club, which, it points out
	"is a successful education project, which increases awareness of waste issues and supports schools in taking action to reduce their waste outputs. Projects have achieved between a 30–80 per cent. reduction of waste within schools."
	Schoolchildren will take that learning with them for the rest of their life. Waste Watch comments:
	"We will lose the opportunity to enable staff and children in Cheshire schools to reduce their waste."
	The Cheshire Landscape Trust has brought to my attention a number of serious concerns, and I should be interested to hear the Minister's response. The trust points out that
	"by moving some £100 million from the private to the public sector, to fund waste management projects, the public sector could lose the substantial amount of matched funding, which is currently running between £400 and £700 million."
	Again, that should be the sort of thing that we want to encourage. Surely, we want to encourage local groups to work with local businesses and to bring in money through match funding. According to the Cheshire Landscape Trust, that will be lost. It asks,
	"how will local communities, universities and other research establishments who are currently undertaking Research and Development projects access funding for sustainable waste management projects in the future?"
	It goes on to express another very serious concern, noting:
	"One estimate puts the number of job losses due to this transfer of funds away from Environmental Bodies to be 5000. This includes jobs created on and through projects as well as employees working for Distributive Environmental Bodies. For this trust, the proposed changes would put us in a very difficult position with possible job losses."
	Finally, I wish to refer to an organisation that no right-thinking Member of Parliament could ignore—the Cheshire Federation of Women's Institutes. The Prime Minister learned to his cost what happens when one puts the women's institutes' backs up. The federation makes the point:
	"The transfer of funds away from Environmental Bodies, many of which bring local knowledge to the allocation of the funds, means that local involvement and community participation will be lost."
	It asked me to bring those concerns to the attention of the Government and the House.
	These are very serious matters. We are talking about good-minded people who give their time voluntarily in our constituencies to work for local environmental groups and improve our local environment for everyone. Those groups will lose out to the tune of tens of millions of pounds.

Alan Whitehead: The hon. Gentleman speaks as though the entire amount that is currently gained in tax forgone will suddenly disappear. Does he accept that, even under the proposals, most of the money that currently goes into the scheme will remain? The money to which he refers relates to the increase and is not taken away from the present amount. Does that not mitigate his case that the money is disappearing from the groups that he is talking about?

George Osborne: I accept that a proportion of the money will remain, but it is quite small; indeed, it will be less than half. According to the letter that I received from the Economic Secretary, approximately £47 million will remain in the scheme annually, but £100 million will be taken out. Only a third of the money will remain. Given the environmental credentials of the hon. Member for Southampton, Test (Dr. Whitehead), I wonder whether he supports the change. Does he think that the Government would be better at spending the money centrally than local charities and environmental groups on the ground? I would be surprised if he took that view, as it is certainly not my view or that of the groups involved.
	I ask the Economic Secretary to reflect on what I have said and deal with my points, some of which he will no doubt have heard about from environmental groups. In particular, will he address the loss of match funding and the question of where the groups will get their money? I know that he is phasing in some of the changes, but in a year or two those involved will be hit with a big shortfall. Will he also comment on the serious job losses that at least one organisation that has written to me predicts?

John Healey: The clause is relatively narrow in the context of this rather wide debate. In line with the escalator that we announced in 1999, it increases the standard rate of landfill tax by £1 a tonne to £14 a tonne, with effect from 1 April this year, and by a further £1 a tonne to £15 a tonne, with effect from 1 April next year.
	The Government are committed to a sustainable approach to waste management. The increases will encourage waste producers to seek more environmentally friendly alternatives to landfill, as they will encourage producers and the waste management industry to switch from landfill to minimising waste and increasing re-use and recycling rates—the very purposes that the hon. Member for Arundel and South Downs (Mr. Flight) urged us to adopt.
	The increases are part of a principled national policy to reduce the volumes of waste going to landfill, and they are complemented by additional public spending on sustainable waste management that was announced in the House on 6 May by my right hon. Friend the Secretary of State for Environment, Food and Rural Affairs.
	The hon. Member for Arundel and South Downs asked about revenue from increasing the landfill tax by £3 per tonne in 2005–06—not in 2003–04 or 2004–05, which are covered by the clause. Although that will make a significant contribution to the increased investment, it is not directly hypothecated. However, the Government made a commitment in the pre-Budget report and the Budget that additional revenue from the increases in the standard rate would be recycled to business.
	Discussions with business and other stakeholder groups have already shown that there is broad support for a package of measures, including some tailored to those sectors facing the greatest waste management challenges. We will continue to pursue that package of measures through developing the options and consulting further, and we plan to make decisions to the time scale in the pre-Budget report and the Budget.
	The hon. Gentleman raised the spectre of fly tipping connected with increases in the landfill tax. There is no evidence to justify that. A Tidy Britain Group survey in 1999 showed that the majority of fly tipped waste is household waste. As householders do not directly pay the landfill tax, it is unlikely to be the cause of the increase in fly tipping. That said, we take illegal waste disposal by fly tipping very seriously. The penalties are now severe: they include unlimited fines and up to two years in prison.
	The hon. Gentleman and the hon. Member for Ceredigion (Mr. Thomas) asked about incineration. As announced in Budget 2003, the Government have commissioned a review of the environmental and health effects of all waste management and disposal methods, and we aim to report on its findings later this year. The case for using economic instruments in relation to incineration will be considered in the light of that work and in consultation with those with an interest in the field.
	The hon. Member for Ceredigion urged the Government to increase the rate of landfill tax more quickly in order sooner to reach what we set as the medium to long-term level of £35 per tonne. Our research and the recommendations of several reports suggest that that level will result in alternatives to landfill being more widely available and becoming more economically viable. As the hon. Gentleman will know from his work on the Select Committee on Environmental Audit, that view is widely shared. Given the lead times for investment, however, the most important factor in stimulating a shift in behaviour away from landfill is not the current rate of the tax, but the confidence, knowledge and certainty that it will reach the medium to long-term level of £35 per tonne. That gives the lie to the accusation by the hon. Member for Arundel and South Downs that we have a short-term set of policies.
	I have been fortunate enough to give evidence to the Environmental Audit Committee a couple of times. I say to the hon. Member for Ceredigion that I am confident that the landfill tax increases, alongside the other policy measures that we have introduced or plan to introduce, will deliver a waste policy that is better suited to Britain, and which increases recyling and re-use, minimises waste production and helps us to make the reductions in volume that we need to meet our European Union targets.
	The landfill tax is not our only measure. We recently passed legislation to introduce a scheme of tradeable landfill permits, which will help. We have substantially increased public spending through the EPCS—environmental, protective and cultural services—block grant to local authorities and the transfer of the landfill tax credit scheme to public spending. That will help. We have also announced plans for a performance fund for waste management for local authorities, and that, too, will help. All those measures will play an important part in helping the United Kingdom meet our targets.
	The hon. Member for Tatton (Mr. Osborne) asked about the national insurance contributions increase, which was introduced in last year's Budget and took effect last month. It will help fund the 7.5 per cent. real-terms increase each year in spending on the national health service from 2002–03 to 2007–08. It has nothing to do with the landfill tax. However, the hon. Gentleman is right that when the previous Government introduced the landfill tax, it was accompanied by a 0.2 per cent. cut in employers' national insurance contributions.
	The Government estimate that in 2003–04, the cut that was originally introduced with the landfill tax will be worth approximately £780 million, compared with about £670 million raised by the landfill tax. Next year—2004–05—the NIC cut will be worth approximately £820 million, compared with £745 million raised by the landfill tax. The revenue from the landfill tax has yet to recoup the original cut to employers' national insurance contributions.
	The hon. Member for Tatton is a member of the Public Accounts Committee and knows the flaws in the design of the landfill tax credit scheme better than many other hon. Members. He knows that flaws in its design caused the problem, because the Committee examined the matter, as did the then Select Committee on Environment, Transport and Regional Affairs. The problem arises from the design rather than the principle of the scheme. The Government strongly support the principle; that is why we have retained it for non-waste projects. We shall not abandon it, but we will transfer the funding for category C and CC projects to public spending because that will deliver a more strategic, sustainable waste management policy and programme in this country. The hon. Member for Arundel and South Downs urged us to do that.
	The hon. Member for Tatton also knows that one of the flaws in the design and operation of the landfill tax credit scheme since its inception has been a chronic lack of information on what the money is being spent. He asked about match funding, but we face a lack of information and evidence on which to assess some of the individual claims and stories that we hear about projects. Glasgow Caledonian university has conducted the only systematic research on that. It suggests that the rate of match funding for waste projects as well as those in other categories of the landfill tax credit scheme is significantly below the levels that the hon. Gentleman cited.
	Although it is not directly covered by the clause, Committee members may find it helpful if I say a little about our plans for the standard rate of landfill tax after the two years to which clause 184 applies.

George Osborne: Before the Economic Secretary moves on, will he deal with the specific point about the loss of match funding and jobs that many groups and voluntary organisations will experience? I presume that people have written to him about that.

John Healey: I do not know whether the hon. Gentleman missed it, but I have dealt with match funding. I believe that he refers to category C and CC schemes, although he was not explicit. They deal with waste, and their funding has been transferred to public spending. I have written to him and other hon. Members and made a statement in the House and he therefore knows that we have put in place for this financial year a transition scheme to help such projects continue and reach a point where they can sensibly plan for a continuing operation after this financial year if they choose to do that. That will play an important part in providing security, certainty and the ability to plan in the long term for the projects about which the hon. Gentleman is concerned.
	As we have already announced, the standard rate of landfill tax will increase by £3 per tonne to £18 per tonne in 2005–06, and by at least £3 per tonne in the years thereafter, on the way to the medium to long-term target of £35 per tonne. These higher rates send a clear market signal, and announcing them in advance maximises the effect. The Government have discussed with business and others how to make the increases revenue neutral to business as a whole. I have explained that the preferred options will now be developed, and decisions on the package of measures will be announced in the 2003 pre-Budget report. On that basis, I commend the clause to the Committee.
	Question put and agreed to.
	Clause 184 ordered to stand part of the Bill.

New Clause 1
	 — 
	Rate of Duty on Spirits

'.—(1) In section 5 of the Alcoholic Liquor Duties Act 1979 (spirits), for "£19.56" there shall be substituted "£18.99".
	(2) This section shall come into force on 1st January 2004.'.
	Brought up, and read the First time.

Angus Robertson: I beg to move, That the clause be read a Second time.
	I am delighted to be able to move new clause 1, which is aimed at reducing the duty on spirits by 3 per cent. This measure is primarily aimed at helping to boost the Scotch whisky industry, but it would of course have a positive effect on the Irish whiskey industry, affecting colleagues from Northern Ireland, and on the constituency in Wales that produces the sole Welsh whisky, Penderyn. It would also help spirit producers elsewhere in the UK who do not produce whisky.
	The new clause has been tabled after discussions with the Treasury, and I am pleased to see the Economic Secretary to the Treasury in his place this evening. A delegation from the all-party Scotch whisky group, on which I serve as vice-chairman, along with other Members from all parties in the House, lobbied the Treasury on this matter earlier this year. Members from all parties also pressed the Government to accept a 4 per cent. cut in duty. That move was supported by Labour, Conservative and Liberal Democrat Members, and, of course, by the Scottish National party. In that spirit, I hope that there will be cross-party support for this measure, as it is more modest than the proposal supported by the all-party group.
	The Economic Secretary to the Treasury does not need reminding that Scotch whisky is one of the UK's top five export earners, generating more than £2 billion a year from sales in 200 markets. The industry uses around 25 per cent. of Scotland's barley, and 70 per cent. of all Scottish grain is used in grain distilleries, many of which are in my constituency in Speyside, which contains more than 50 per cent. of Scotland's malt whisky distilleries. The industry accounts for 5 per cent. of manufacturing jobs in Scotland and there is a £1 billion a year spend on the purchase of goods and services from local suppliers. Forty thousand jobs depend on the industry, including 7,000 in rural areas, many of which have fragile economies. Indeed, my constituency has the lowest weekly wage of anywhere in Scotland, although that is not something of which people are proud. Any measure that helps to boost an industry of such significant importance must, therefore, be welcomed.

Pete Wishart: I am sure that my hon. Friend will join me in welcoming the decision to reopen the Glencadam distillery in Brechin. Does he not agree that, for new businesses such as that to develop and thrive, we need a fiscal regime that encourages rather than penalises?

Angus Robertson: I agree with my hon. Friend. That point is being made across the industry, no matter where the distilleries are located. All the key indicators that I have outlined underline the importance of the industry throughout Scotland, and illustrate the need for the Government to provide the optimal conditions for it to flourish.
	Over the years, commentators have established that the taxation regime at home and abroad is one of the most significant factors in determining whether whisky sells as well as possible. In recent decades, Scotch whisky has made great strides in markets such as Spain, Italy, the United States and the far east—all areas with generally more benign tax regimes. Sadly, some of the worst taxation excesses are to be found in the UK, the state that benefits from massive revenue from the industry.
	As most whisky drinkers will be aware, two thirds of the price of a bottle of whisky is tax. Since 1973, the price of a bottle, including the excise duty, has been subject to VAT, which is levied on the duty price paid. That means that the price of a bottle of Scotch whisky is increased by and subject to a tax upon a tax. On 10 occasions in 18 years of Conservative government, sadly, the Tories took the opportunity to raise the burden on the whisky industry. That discrimination has continued under the Labour Government, and the duty on whisky is one and a half times higher than on other competing beverages.

Peter Duncan: Before the hon. Gentleman launches into his usual discourse in anti-Conservative propaganda, he will note that his new clause only returns the situation towards that left by the previous Conservative Government.

Angus Robertson: I have sought to table a new clause that will attract maximum support across the House. I would like to see far more considerable cuts in duty, but this is a good first measure, and it is supported by Conservative Members, Scottish Labour party Members in the all-party group and Liberal Democrats. I hope that this modest proposal will receive the support of all hon. Members who have been lobbying the Treasury and that they will support it in the Lobby tonight.

Roy Beggs: I note how enthusiastic the hon. Gentleman has been in his observations in the promotion of Scotch whisky. Is he prepared to accept that in North Antrim, a neighbouring constituency of mine, the Bushmills distillery also produces high quality and exportable brands of what I would claim to be the best whiskies in the world, and that we too would benefit from a sensible fiscal regime that would help to promote the industry?

Angus Robertson: I am grateful to the hon. Gentleman for his intervention. I mentioned in my opening remarks that this measure would also benefit the industry in Northern Ireland, and I am delighted to see that the cross-party consensus is growing. I hope that that will be shown in support for the new clause—from Government Members as well—later this evening.
	It is the discrimination against this key industry that the industry and the people who work in it baulk at. There has been some recent narrowing of tax discrimination against spirits, but the discrimination remains. It was continued in this year's Budget by a Chancellor who represents a Scottish constituency.
	Like the Scotch Whisky Association, the Scottish National party has been in favour of a 4 per cent. cut in whisky duty, and experts believe that such a measure would be revenue neutral, creating a high demand for whisky, thereby maintaining duty and taxation income for the Treasury.
	Most distilleries are based in rural areas, such as my constituency of Moray, and they are often the life-blood of the community. A duty cut for Scotch would have helped end the competitive disadvantage that discriminates against Scotland's farmers and rural communities. That can equally be said for Northern Ireland and Wales, and arguably also for spirit producers in England.

Alistair Carmichael: I agree with the substance of the hon. Gentleman's remarks, but does he agree that the vast bulk of whisky distilleries in Scotland are in remote areas where manufacturing industry is difficult to maintain, and that the discrimination is not just against the industry but against some of the most vulnerable and fragile economies in the United Kingdom?

Angus Robertson: I agree with the hon. Gentleman and I am delighted also to have support from the Liberal Democrats on this measure. Undoubtedly, a reduction in duty would not harm the Treasury. It would boost rural and urban communities throughout the UK. I urge all hon. Members, many of whom have been lobbying the Treasury for a more generous cut in duty, to go through the Lobby with us tonight, although I hope that the Minister will announce that the Government are to accede to a 3 per cent. cut in duty, which would be welcomed by Scotch whisky producers and others.

Peter Duncan: I am delighted to have an opportunity to contribute to the debate on new clause 1—and to reach new clause 1, given the somewhat spurious point of order that was raised by the hon. Member for North Tayside (Pete Wishart) earlier. I am delighted that the official Opposition have done what they could to progress matters in the context of the Government's appalling knife on the Bill. The official Opposition have done their utmost to debate as much as was humanly possible.
	There is no need to remind the Committee of the significance of the Scotch whisky industry to the people of Scotland. The hon. Member for Moray (Angus Robertson) has given some statistics. I can add a couple of others. One in 54 jobs north of the border is dependent on the Scotch whisky industry. More than 11,000 people are directly employed in it. It also provides jobs indirectly, crucially in some remote and vulnerable communities, and attracts tourism, so there is a significant cause around which, I hope, a significant number of Members of Parliament from Scotland will unite tonight.
	I have drawn attention to the fact that the tax system on spirits originated early in the previous century. The comments by a Chancellor in the 1920s sum up where many of the problems originated. When he was asked to justify his decision to increase tax on spirits but not on wines, he said, "nobody drinks wine," which probably gives some background to why the imbalance has arisen, how it has been amplified over time and why we should do something to redress it.
	The rates applied to typical pub servings of whisky, wine and beer show the imbalance: the rate is 27.38p for Scotch whisky, 19.3p for wine and 16.65p for beer. The industry in Scotland can no longer tolerate that imbalance. Something must be done to start to redress it; it is obviously having an effect.

George Osborne: This is an important debate. Is it not worth noting for the record that only two Labour Scottish MPs are in the Chamber at the moment?

Peter Duncan: My hon. Friend is known to be a bit more pointed than I tend to be, coming from a very quietly spoken corner of Scotland, where we tend to be a bit more reserved and backward in coming forward, but I note that there are few Members of Parliament from Scotland on the Labour Benches. I am slightly surprised that the chairman of the all-party group has not managed to be with us tonight: I am sure that he is attending to urgent constituency business.
	What other European country would tax its own indigenous industry more severely and aggressively than it does its competitors' products? There is an important issue here, and the new clause goes some way towards dealing with it. There is a gain in taxation to the Treasury if taxation imbalances are addressed. Studies have shown that there is price sensitivity in the market for domestic spirits and that increasing tax again and again on the industry has done nothing to increase the net revenue to the Chancellor in total.
	The increasing and dramatic expansion in bootlegging and the white van trade does not only affect south-east England; corner shops in Galloway or Brechin in north-east Scotland and in all rural communities, are affected. Their sales have dramatically declined because of the expansion in bootlegging and in illegitimate trade. That is to say nothing of the more tricky issue of diversionary fraud, which affects the industry significantly although it may be invisible to ordinary people in Scotland.
	Redressing the tax imbalance would cost the Treasury nothing. I accept that more needs to be done to demonstrate that factually, and to test price sensitivity and elasticity of demand not just in the whisky market but, in cross-referential terms, in the wine and beer markets, but preliminary evidence suggests that the Treasury could implement a degree of reversal without causing itself much of a revenue problem.
	All too often, the nationalists launch a grandstanding programme on issues such as this. We saw that yesterday when they attempted to hijack the bingo taxation issue. I understand that they have already been in touch with most bingo halls in Scotland, which suggests that theirs is the only party that acts on behalf of those who play bingo. It is not, however, the only party to stand up for the distillers: we in the Conservative party are stout defenders of the whisky industry, as we have been in the past. As I said in an intervention, the new clause would do no more than return us to the position brought about by the last Conservative Budget, which recognised the price elasticity I have mentioned and reduced the tax burden on spirits. My right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who was Chancellor at the time, realised that reducing the tax need not mean a reduction in Treasury revenue.
	As a member of the all-party Scotch whisky group, I support its cross-party objectives. I do not think that the hon. Member for Moray did much to strengthen his case by saying that the Liberal Democrats supported the new clause, but I accept that all parties are involved here, and I shall certainly implore Conservative Front Benchers to give it proper consideration.
	I should like the new clause to mark the beginning of a genuine investigation of how an historic imbalance in the taxing of spirits can be redressed with no impact on Treasury revenues, to the benefit of an industry in Scotland that urgently needs assistance and from which our nation can derive great economic gain in the future.

Alan Reid: It is an important principle that taxation should be fair, and it can be easily demonstrated that the taxation of alcohol is not fair. The tax per unit of alcohol imposed on whisky is about 1.5 times that imposed on wine, and 1.7 times that imposed on beer. I shall support new clause 1 because I believe it is a step in the right direction, although I do not think it goes far enough. I know that the hon. Member for Moray (Mr. Robertson) agrees. It is important that we have a new clause before us that can be supported by members of all parties.
	The all-party group lobbied Treasury Ministers for a 4 per cent. cut. The new clause proposes a 3 per cent. cut, but I presume that all members of the group will support it.

Robert Smith: The new clause would also redress to some extent the damage done to the industry by the effects of corporation tax, which was raised on Second Reading by my hon. Friend the Member for Yeovil (Mr. Laws) and which I understand the Minister is considering.

Alan Reid: My hon. Friend makes a very important point. The changes in corporation tax that the Government introduced last year are utterly ridiculous so far as the whisky industry is concerned. Whisky takes many years to mature, but the new corporation tax regime punishes the industry for that factor, which is an essential part of it. If accepted, the new clause would certainly help to mitigate some of the losses that the industry is incurring through that change in corporation tax.
	If whisky were taxed at the same rate as wine for each unit of alcohol, the rate would be about £13 per litre of alcohol instead of £19.56. The Government have introduced a freeze in recent years, but it will take many years before the rate of taxation on wine and whisky is the same. We cannot wait that long, so it is essential that we make a start today by supporting new clause 1.
	The Chancellor should not worry about any loss of revenue if the new clause is accepted. Studies produced for the Government Economic Service and the European Commission indicate that the sale of spirits is very sensitive to changes in price—far more than is the sale of wine. So reducing the tax on spirits and increasing that on wine to a comparable level would actually bring in more money for the Treasury.
	Scotch whisky is the world's leading spirit drink. It can be produced only in Scotland, but it also relies heavily on products produced throughout the United Kingdom. It therefore seems bizarre that a product that is so important to the UK economy be taxed far more heavily than wines, most of which are imported. I doubt whether any other country in the world would be so daft—talk about shooting yourself in the foot! The high rate of tax not only damages sales in our own country; it also encourages other countries to impose punitive rates of duty. India, for example, has a tariff of more than 400 per cent. on Scotch whisky. Yet when British trade negotiators protest about this harsh treatment, such countries have a simple riposte: "But your own country also discriminates against whisky!"
	I need not remind the Committee of the importance of Scotch whisky to our economy. The industry employs more than 10,000 people directly, and supports a further 50,000 jobs through its spending on inputs. And it boosts our balance of trade by more than £2 billion a year. The industry is also a major employer in areas where other jobs are very hard to find: in urban areas with high levels of deprivation, and, of course, in remote rural areas with fragile economies and little alternative employment. For example, on the islands of Islay and Jura, where the finest single malts are produced, there is very little alternative employment. As a result of the Government's punitive actions, their product brings in large sums for the Treasury, only a fraction of which is returned to the islands to be spent on public services. An industry such as the Scotch whisky industry should be encouraged, not penalised; surely it has the right to be taxed at the same rate as its rivals.
	New clause 1 is a step in the right direction and I hope that all members of the Committee will support it.

Stephen O'Brien: New clause 1, which was introduced by the hon. Member for Moray (Angus Robertson), would reduce the rate of duty on spirits, and would thereby affect, of course, the domestic Scotch whisky industry. I ought really to declare an interest at this point, in that I do enjoy partaking from time to time. I shall not pass comment on which is my favourite brand, except to say that it is both famous and of the bird variety.
	The new clause would reduce the rate from the current level of £19.56 per litre of alcohol to £18.99, and, as was rightly pointed out by my hon. Friend the Member for Galloway and Upper Nithsdale (Mr. Duncan), the latter rate was held in 1996, in the last Budget introduced by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke).

Alex Salmond: Some of us have reasonably long memories. We remember the right hon. and learned Member for Rushcliffe (Mr. Clarke), the last Conservative Chancellor, being overturned on VAT on fuel in this Chamber. He recouped the revenue the very next day, announcing a punitive rise in tax on whisky. May I have an assurance that that was a mistake on the part of the Conservatives?

Stephen O'Brien: The hon. Gentleman and his party are introducing a new clause. If they want to persuade hon. Members throughout the House, they might find it more constructive to introduce their arguments in a more consensual and less nitpicking manner. The Conservative credentials on Scotch whisky are there for all to see. [Interruption.] At least my right hon. and learned Friend the Member for Rushcliffe had the decency to have some whisky next to him when he presented his Budgets. The current Chancellor, despite representing a Scottish constituency, never has whisky anywhere near him. That is one great difference on Budget day.
	We need to examine the rate at which my right hon. and learned Friend the Member for Rushcliffe had reduced whisky duty when he presented his last Budget. My right hon. and learned Friend told me earlier today that he had hoped to attend the debate, but he is otherwise detained on other parliamentary business. He may be able to join us later; let us wait and see.
	It is interesting to note that, since we started debating the new clause, we have had only one Scottish Labour Member in the Chamber—the Secretary of State for Scotland—

Anne McGuire: Wrong one!

Stephen O'Brien: I am sorry. We have the Under-Secretary of State for Scotland, the hon. Member for Stirling (Mrs. McGuire) in her place. [Interruption.] Noises from behind me suggest that the Secretary of State is feeling bored with her present job. She may be trying so hard to sell the euro that she has forgotten to help the Scotch whisky industry to sell its product.

Peter Duncan: I would like to reassure my hon. Friend on one point. The Scotland Office alcohol bill last year represented a substantial increase on the previous year, so the Secretary of State's commitment to Scotch whisky cannot be in doubt, bored though she may be.

Stephen O'Brien: I hope that when my hon. Friend received his parliamentary answer, the disaggregation of the different alcohols consumed in the massive increase showed that whisky was the main spirit consumed, thus making an important contribution to the local economy.
	The one Scottish Labour Member who was present earlier appears to have disappeared already. Perhaps he is hanging his head in shame for not being able to persuade his party to think constructively along the lines of the new clause. It proposes a reduction of approximately 3 per cent. The Scotch Whisky Association advocated a more substantial reduction, so it is important to reflect on the most appropriate level that is potentially sustainable. We have to assess the background reasons and ensure that the level can be justified.
	As my hon. Friend the Member for Galloway and Upper Nithsdale (Mr. Duncan) pointed out, the Scotch whisky industry employs more than 50,000 people in Scotland—one in 54 jobs—and the UK spirits industry as a whole employs 65,000. Whisky, the major domestic drinks industry in Scotland, is taxed more heavily than other alcoholic drinks, particularly beer and non-fortified wine—more than 150 per cent. more heavily per unit of pure alcohol.
	Another good background argument is that the Government increased the duty in their first Budget in 1997 to the same level imposed by my right hon. and learned Friend the Member for Rushcliffe, but have frozen the duty since. It was interesting to hear the Chancellor claim in his Budget speech this year that he had a wonderful track record—I use the words advisedly—over the past five years, in which he had frozen the duty. He managed to overlook the fact that, six years ago, he had increased it sharply. It is for people outside this place to judge whether the level of spin in his Budget speech resonated in any way with the words of the former Secretary of State for International Development, the right hon. Member for Birmingham, Ladywood (Clare Short). The imbalance in the duty levels—highlighted in other contributions as well as my own—has effectively been frozen. It would be a shame if any party sought to claim to be more of a friend of Scotch than any other. The Scottish National party likes to think that it is the only friend of Scotch, although the record shows that not to be true. Scotch has many friends, including those of us in the official Opposition. Given what we have just heard from the hon. Member for Argyll and Bute (Mr. Reid), the Liberal Democrats are also claiming to be friends of Scotch. However, are the Government Scotch's friend? Are they looking at the genuine issues involved in the serious costs implications, the competitive position and the imbalances that have been created?
	An important point in this context has been made about corporation tax, which adds about £25 million to the costs of the Scottish whisky industry. Again, that flies in the face of the rhetoric of a Government who like to claim that they bring only good news for everyone. The reality in the real universe—if not in the parallel universe that the Government seem to inhabit—is what people have to deal with. The Government merely like to spin about such matters.
	It is important to find a position that is fair for Scotch whisky, and for spirits in general but, given the proportions involved, it is Scotch whisky that is uppermost in our minds. We welcome any party that supports returning to levels of tax that existed before the current Chancellor came to office. The new clause moved by the Scottish National party proposes just that.
	The Minister will no doubt want to tease out of us our view of the revenue implications of the new clause. That is a difficult judgment. The Treasury claims that it has the only model that works, but that model's performance in relation to other matters—such as forecasts—has not been especially reliable. One problem in connection with Committee discussion of the Finance Bill is that it is very difficult to get the Government to acknowledge that data that are difficult to square with they want to achieve ought to be published—not least because the data have been paid for by the taxpayer.
	According to our best estimate, a reduction in duty is likely to be revenue neutral, as it will be compensated for by higher UK sales. Even Government economists believe that a duty cut could boost revenues. However, that is anecdotal, in the absence of the demonstrable evidence that we believe that the Treasury has but chooses not to publish.
	The Government's economic service data—the best data that I have been able to find on this matter—suggest that the excise cut proposed in the new clause would be neutral. That is based on the argument that the cut would reduce smuggling. I do not want to go over the arguments that we usefully explored yesterday in connection with tobacco smuggling. However, it is clear, although they will not say so, that even the Government think that the proposal is likely to be neutral. If it were adopted, the new clause would support corner shops throughout the UK, and especially in Scotland. It would also offer a way of reducing the problems of what is known as diversion fraud.
	The Conservative party is Her Majesty's official Opposition. We believe that there is a genuine prospect of being able to govern again, and that, in government, we will be able to deliver. It is therefore appropriate for us to support the new clause.
	We support the duty reduction in principle and consider that an important point has been made. However, the Government must also commit to making an updated, open assessment of the impact of duty levels on sales of spirits. Only then would we be able to support further duty reductions—a trend that I suspect may tempt other parties. It is important to get a genuine impact assessment as to where elasticity operates in terms of price and volume, and in relation to cross-border sales and smuggling sales and non-sales.
	The new clause is a matter of fairness; it is common sense and is wholly in line with what the Conservatives were able to achieve when we were in government. We believe it to be right. We believe it to be tax neutral and are glad to support it on behalf of the Scotch whisky industry of Scotland and all those who wish to enjoy the benefit of a reduction.

John Healey: I welcome both the chance to debate the new clause and the fact that the hon. Member for Moray (Angus Robertson) has tabled it. I also welcome the strong turnout of officers of the all-party Scotch whisky group.
	The new clause would reduce the rate of excise duty charged on spirits by 2.9 per cent. and, as the hon. Gentleman said, restore the rate to its 1997 level. In essence, the hon. Gentleman argued that, without the new clause, the Finance Bill would not go far enough to support the UK spirits industry. Both he and the hon. Member for Argyll and Bute (Mr. Reid) made the case for what is known as unitary taxation, whereby all alcoholic drinks are taxed equally, according to the percentage of alcohol that they contain.
	As my right hon. Friend the Chancellor announced in his Budget statement, we have this year frozen excise duty on spirits for the sixth successive Budget. I shall explain in a little more detail exactly what that means, as it seems that some people take the duty freezes for granted and are clamouring for more.
	This is the longest period of duty freezes on spirits since the 1950s. Without those freezes, the total tax on a standard bottle of spirits would have been about 92p higher, if duty had increased in line with inflation. The freezes represent a real-terms cut of 12 per cent. The duty on spirits is almost 40 per cent. lower in real terms than it was 10 years ago. It is 57 per cent. lower in real terms than 30 years ago. In recent history, this and previous Governments have constantly reduced the incidence of excise duty on spirits.

Peter Duncan: I accept the Economic Secretary's point about the freezes for the past five years, but does he agree that we should be freezing the iniquity so that Scotch whisky is not at a disadvantage compared to beers and wines from outwith our country?

John Healey: I shall deal with the accusations of discrimination and iniquity later.
	Alcohol in spirits is more heavily taxed than alcohol in beer, still wine and cider. Spirits duty is 60 per cent. greater than beer duty, but there has been a gradual move towards reducing that differential and, since 1997, the Government have played a part in that. As I said, there is a 60 per cent. difference in the duty for beer and spirits but in 1997, it was 76 per cent.
	Our approaches to decisions on alcohol duty are made Budget by Budget, and they take into account a wide range of relevant factors, including relevant duty levels in different drinks sectors. They also have regard to the particular circumstances at the time; for example, the state of the industry or the level of demand for particular drinks.

Robert Smith: In an industry where there is such a long time lag, it is a pity that the Budget decisions are made only on a yearly basis. Earlier, we discussed the need to give industry long-term indications of the Government's intentions. Would it not be helpful to see a forward plan for the tax basis for spirits?

John Healey: Our record speaks for itself, but at present we have no plans to change the approach whereby we make such decisions on a Budget-by-Budget basis.
	Like previous Governments, we recognise that the benefit of taxing categories of alcoholic drinks rather than alcohol itself is that it allows tailored responses to inevitably changing circumstances. If we were to tax rigidly on the basis of alcohol content alone, we might lose that valuable flexibility. Nevertheless, we are committed to delivering a fairer balance in the burden of taxation falling between different alcoholic drinks and different types of drink producer, and we have consistently done so, as I said, Budget by Budget, since 1997.
	The hon. Member for Moray describes the UK duty regime for spirits as discriminatory. On the contrary, we have one of the least discriminatory regimes of any country. [Interruption.] I hear the question, "What about those on the continent?" asked from a sedentary position. No EU member state applies a system of unitary taxation and all member states apply a higher rate of duty to spirits than to beer and wine. It is also a fact that the UK has the lowest differential between spirits and beer of any EU member state. In Germany, spirits duty is more than six and a half times beer duty. In France, the factor is five and a half times and, in Spain, spirits duty is more than three and a half times that of beer. To answer the question asked by the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan), those are all significant spirits producing nations.

John Baron: Will the hon. Gentleman give way?

John Healey: I think that the hon. Gentleman has just joined this debate, although he has been in the Chamber for most of the day, as I have, so I will give way to him.

John Baron: I thank the Minister for being so generous. The fact that there is a greater inequality on the continent surely does not lessen the fact that the inequality that we have here is basically wrong, and one cannot get away from that. I put it to him that most economists, including some of the Government's economists, are of the clear view that, if the Government were to lower the duty, they could boost revenue. To what extent are the Government examining that case, with a view to taking that action?

John Healey: Perhaps the hon. Gentleman should have been a little more patient because I am about to deal with that very point, which a number of hon. Members made, perhaps before he rejoined the debate.
	We recognise the enormous contribution that the spirits industry makes to the UK economy and, indeed, to the Scottish economy, and its importance to our balance of trade. I also recognise its particular importance to the constituency of the hon. Member for Moray. However, I have to tell him that we have taken consistent steps since coming to power to deliver a fairer balance in taxation between alcoholic drinks, including six successive freezes in spirits duties. In deciding spirits duties, my right hon. Friend the Chancellor has to weigh up a range of factors, including the different circumstances of all sectors of the alcoholic drinks industry, as well as our spending priorities.
	The fact remains that duty freezes and, even more so, cuts, cost revenue. The estimated cost of this year's freeze in spirits duty is £30 million. New clause 1 would cost an additional £30 million in the first full year of its implementation. The hon. Member for Moray shakes his head, but I have to tell him that there is no free way to cut alcohol and spirits duty. May I tell him, the hon. Member for Galloway and Upper Nithsdale, especially if he is about to jump to his feet, and the hon. Member for Eddisbury (Mr. O'Brien), who asked about modelling, that we publish the demand elasticity models on which excise duty costings are based?
	The alcohol model that the Government published most recently was based on the model devised by Professor Marcus Chambers, which was updated in 1999. That is an independently, expertly and academically devised model. We are working on, and have almost completed, a substantially improved alcohol demand model, and we are currently preparing it for publication. It will be published as a Government economic service working paper before long. The improvements that we have been able to make to the model will help to answer some of the points that have been made, but, more importantly, they will better inform such debates in the House and elsewhere in future.
	The key improvements to the new model involve splitting beer into on and off-trade sales to achieve a better understanding of the dynamics in the beer sector and using better data, specifically following the completion of the European single market, to take better account of cross-border shopping as a factor in overall demand. As I said, that will be published shortly as an economic service working paper.
	The point made by the hon. Member for Argyll and Bute about corporation tax treatment was raised by at least two other hon. Members on Second Reading last week. As my right hon. Friend the Paymaster General indicated in her response then, we are aware of the concerns of the Scotch Whisky Association, which it raised directly with me in our meeting before the Budget. We are discussing the issues with its representatives, and the measure was not designed to achieve such outcomes.
	I am grateful to the hon. Member for Moray for giving us the opportunity to have this debate. To hear him speak, however, one would have expected universal disappointment from the spirits industry and universal condemnation of this year's Budget freeze, which is not the case. Let me quote Hugh Morrison, chief executive, no less, of the Scotch Whisky Association:
	"The Chancellor's decision to narrow the duty gap is good news for the industry and represents further progress towards the industry's goal of a modern tax system for alcoholic drinks. Distillers will be raising a collective toast to the Chancellor."
	In summary, we recognise the importance of the whisky industry to this country and to Scotland. In this Budget we have frozen spirits duty for the sixth successive year—the longest period of freeze since the 1950s. That has been warmly welcomed by the industry on behalf of which the hon. Member for Moray seeks to speak. We are pursuing a policy aim of fairer taxation between drink sectors but not a policy of equalising taxation. For those reasons, I urge the House to reject the new clause.

Alex Salmond: I want to make a slightly unexpected contribution in support of my hon. Friend the Member for Moray (Angus Robertson)—it is unexpected because I was hoping to speak on the next clause on oil taxation, which is equally important to the Scottish economy, but a combination of guillotine procedures from the Government and some long-winded speeches earlier made that impossible. I therefore want to add my voice to my hon. Friend's excellent arguments in relation to the whisky industry.
	I sat through these debates all afternoon, and I am one of very few Members who are present who did so. I sat through amendment after amendment, but there were never more than eight Conservative Members in the House speaking to amendments, which they said were crucial. They were right to berate the Government for having no Labour Back Benchers from Scotland present for a whisky debate—the Under-Secretary of State for Scotland, not the Secretary of State, was the only representative. Equally, however, the Government and the Opposition should look at what is considered to be worth the allocation of time in Finance Bills. Many of the debates—I am sure that many Members who are now present were not here—were so detailed that hon. Members would have had some difficulty in bringing themselves to participate in them.
	When we debate this new clause, however—and the new clause on the oil industry, had we been able to reach it—we are debating matters that touch the livelihoods and jobs of thousands of people in Scotland and elsewhere. Perhaps the attendance that we have now in the House is related to the fact that we have finally reached a new clause about which most hon. Members feel confident that they know something. That does not excuse the Government, however, for not allocating time to allow significant, substantial amendments affecting employment to be properly and adequately debated.
	It is unfortunate that the Chancellor was not able to join us today. I understand that he was closeted away with the Prime Minister discussing other things. It is unfortunate too that the Secretary of State for Scotland was not able to join us—no doubt she was away making speeches stabbing the Chancellor in the back. Both right hon. Members should be concerned about the fate of the whisky industry, and both should be concerned about kick-starting exploration and jobs in the North sea. Given the amount of revenue that this and previous Treasuries have accumulated from the whisky and oil industries, one would think that the Government might allow sufficient time for a proper debate and make the relevant concessions that will keep those vital Scottish industries on the road.
	The level of interest, time and concern that the Treasury Bench has devoted to such vital matters will not go unnoticed by people in Scotland. I thought that the Economic Secretary did a substantial and useful job on the concession on oil pipeline taxation. I hope that the next time we debate vital industries in Scotland, he allows us the time to do that and ensures that the personnel are available so that we have a substantial discussion. I also hope that the Government give those vital industries the priority to which they are entitled.

Angus Robertson: I am pleased that I tabled the new clause. The Scottish National party feels strongly about the measure, which is crucial to an industry throughout Scotland. I am glad that at this late stage, in the last few minutes of our proceedings, some Scottish Labour Members have turned up to hear the debate and argument on this key issue. I am surprised, however, that not more are present because I went with them to lobby the Treasury earlier this year on the matter, on which there was cross-party consensus. Scottish Labour MPs agreed that duty should be cut by 4 per cent. That idea was also supported by Liberal Democrat and Conservative MPs, and had the support of Northern Irish colleagues, as we heard. I am surprised that not one of those Labour Members who were prepared to lobby the Treasury for a 4 per cent. cut were prepared to speak in the debate and I hope that they will vote in favour of the more modest 3 per cent. proposal in the new clause.
	The Economic Secretary said that there is no discrimination. That is news to anyone who lives in a whisky-producing region. I know that he has an interest in the industry and I extend an invitation to him to visit Speyside to explain why whisky produced in Dufftown costs more to buy at home than on holiday in Spain. The idea that the duty rates do not discriminate against Scotch whisky is preposterous, and everyone in Scotland knows it.
	Members who have just arrived in the Chamber should understand that the new clause is not just about Scotch whisky; it would also have a positive impact on whiskey produced in Ireland, which is important to colleagues from Northern Ireland, and on spirit producers in Wales and England. It is a modest proposal and does not even go as far as the Scotch whisky industry wants it to. That is why I will press the new clause to a vote.
	The Economic Secretary did not give a commitment to continue the freezes. Such freezes are welcome, but the discrimination continues. We should end it and roll it back. With the support of hon. Members on both sides of the Committee, I hope that we can start that process.

Question put, That the clause be read a Second time:—
	The Committee divided: Ayes 174, Noes 292.

Question accordingly negatived.
	Bill (Clauses 1 ,4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and new clauses and schedules tabled by Friday 9 May relating to excise duty on spirits or R&D tax credits for oil exploration) reported, with amendments, pursuant to Order [13 May]; to lie upon the Table.

Northern Ireland Assembly (Elections and Periods of Suspension) Bill

Mr. Deputy Speaker: Under the terms of the Order of the House of 12 May, any Lords amendments relating to the Northern Ireland Assembly (Elections and Periods of Suspension) Bill must be considered forthwith, without any Question put. I should add that copies of the amendments are available in the Vote Office.
	Lords amendments considered.

Clause 1
	 — 
	Election of Next Assembly

Lords amendment: No. 1.

Des Browne: I beg to move, That this House agrees with the Lords in the said amendment.
	The Bill that we debated on Monday attracted a wide range of comment in the House. The time scale, which was dictated by circumstances, meant that there was little or no time for earlier consultation, but we have looked again at some of the provisions in the light of comments made here and in another place. I might say that the other place debated all parts of the Bill without any programme motion in, if my arithmetic is correct, less than two hours and thirty minutes. In consequence of those considerations, earlier today we tabled in another place two amendments, which I hope may meet a number of the concerns expressed here and in the debates in the other place.
	We continue to believe, of course, that the Bill is in itself right, although the need for it is highly regrettable. The Government were heartened by the number of reflections of that view from senior figures on the Opposition Benches here and in another place. We are, however, aware of and sympathise with the feelings that have been widely expressed that a decision of this sort should not simply pass out of Parliament's hands without further provision for scrutiny once the Bill is through. Indeed, the Delegated Powers and Regulatory Reform Committee reported in that sense on clause 1. Accordingly, the amendment subjects the calling of an election by the Secretary of State to the affirmative procedure. The House will have to vote to approve any election date set by the Government. Because, however, we believe that, following a political accommodation that made an election possible, there would be a general wish to proceed swiftly to the holding of an election, the amendment will make it possible for the order to be considered after making.
	We have some experience of the need to move quickly in Northern Ireland. For example, the suspension and restoration powers in the Northern Ireland Act 2000 are exercisable, and have been exercised, with votes taking place after making. Concern was expressed in another place that Parliament should have an opportunity to debate any such order as soon as possible. I am happy to give this House an undertaking on behalf of the Government that the method of debate and where it takes place will be subject to consultation at the time.

Martin Smyth: The Minister says that the debate will be subject to consultation, but surely Parliament should be in a position to do the debating, rather than doing it in Committee.

Des Browne: I made my observations about the amendment in appreciation of the very point that the hon. Gentleman makes. He can be assured that the Government would take such an order as an extremely important step in the process of the exercise of the franchise in Northern Ireland, and that we would, in consultation, adopt such a posture.
	We have no wish to avoid parliamentary scrutiny. We see the 28-day period within which Parliament would be required to debate and vote on the order very much as a maximum. In the event that we did make an order for an election in this way, I give the House the Government's assurance that we would bring it before Parliament for debate as soon as was practicable.
	The amendment gives the House an opportunity to debate any calling of an election to the Assembly in Northern Ireland. I hope that that will be of comfort to hon. Members, and I invite the House to approve the amendment.
	I want to take this opportunity to pay tribute to the officials who have contributed assiduously over a concentrated period to ensure that the work that was needed to get the Bill to its present stage was done expeditiously and efficiently.

Quentin Davies: We have had a great deal of discussion about this matter over the past few days in the House and in another place, and the Government are well aware of our views about elections. We believe that electoral dates should be respected and that electoral laws should be regarded as being above political convenience or the intervention of Governments. These are very important matters.
	The Government are also well aware of our view that we must do nothing to prevent a review from happening in accordance with the Belfast agreement on 1 December or to make it impossible for the Belfast agreement to be implemented in its entirety. Conservative Members feel strongly about that. We are worried that the Government who produced the Belfast agreement—I pay tribute to the Prime Minister for that achievement—are taking measures that make its implementation impossible.
	Much discussion has taken place between the Under-Secretary, the Liberal Democrats and me in the past few days. It is right to make it clear to hon. Members that we decided not to oppose the amendments on the basis of two assurances. The first was that the date of 31 December should be changed to 13 November. I expect that the Under-Secretary will claim that the officials made an honest mistake, but he and I specifically discussed whether the date was 13 or 15 November on the telephone this morning. We agreed that it was 13 November. The point is significant because 15 November is a Saturday and there is a justified suspicion that if nothing happens by the Saturday, matters will be held over until the following week. The urgency is created by the date of 1 December.

Des Browne: I hate to correct the hon. Gentleman, but we spoke this afternoon, although I tried to contact him this morning. I had a conversation with him about the date. Unfortunately, by the time I managed to speak to him, an agreement had already been reached in another place between Conservative representatives and the Lord Privy Seal. On the basis of that agreement, which was made in the hon. Gentleman's absence because nobody could contact him, the amendment was printed. I tried to contact him subsequently to explain what had happened, and I have been looking for him around the building for some time. I noticed that he came in as the debate started. He was not contactable. Perhaps he could explain the reason for that.

Quentin Davies: I had a conversation with the Under-Secretary and we reached an agreement. It should not be necessary to have a subsequent conversation after one has reached an agreement. Moreover, he knows that I took action on the basis of our conversation early this afternoon. It involved people in another place doing things that they would not otherwise have done. It was therefore a decisive conversation.
	It is perhaps useful for the public and those who listen to our debates to appreciate that there are, rightly, two sides to the conduct of legislation in this place. There is public debate and sometimes there is a need for compromise and understanding between parties. Conversations sometimes occur outside this place, as they should in any democratic assembly. However, they must be based on full trust and understanding. We had an agreement and one party took action in good faith on that basis. It does not matter whether the Under-Secretary was trying to contact me or whether I was on Mars. The agreement should have stood, because we withdrew an amendment in another place.

Des Browne: I greatly regret that I did not have the opportunity for a private conversation with the hon. Gentleman this afternoon or this evening about the matter. That happened because he was not contactable, not because I was trying to avoid that conversation. However, the Conservative party in another place had already reached an agreement and taken the steps that, according to him, were conditional on his intervention. That is why I wanted to speak to him to explain what had happened. He appears to be making a mountain out of a molehill about whether elections will be held on 13 or 15 November. Frankly, that has nothing to do with the amendment that we are considering—it relates to amendment No. 2. However, since he is making such a song and dance about it, he should understand what happened.

Quentin Davies: I wanted to deal in the same breath with the two agreements that we reached. They determined the Opposition's action on the amendments, and both hang together. One is the declaration, which the Under-Secretary undertook to make, that if the Government—I see from his gestures that he intends to fulfil that undertaking, and I shall not anticipate the statement to which we are looking forward. The other was the matter of the date.
	This is not an ideal situation. What has emerged is a compromise, and it is right that there should be compromises in a democratic country. Sometimes, I think that there should be more compromises, and more consultation. I hope that, when there is a change of Government in two years' time, we shall abide by that aspiration and that principle—indeed, I am sure that we shall. I also hope that we shall not regard ourselves as having a monopoly of wisdom, and that there will be occasions on which we shall be prepared to come to reasonable agreements. I am glad to say that the Government have done that on this occasion, and I pay tribute to them for that. It must be in the interests of the people of Northern Ireland that we can have a frank exchange of views, that different points of view can be put strongly, and that, at the end of the day, all those points of view can be accommodated to some extent—although not, inevitably, 100 per cent.—in the agreements that are reached.
	I shall give the House and the Government the assurance that they are waiting for: on the basis of the assurances that I have received, we shall not oppose the amendment further. I look forward to hearing the comments of the representatives of the other parties and, on the subsequent amendment, to the promised declaration by the Minister.

Alistair Carmichael: The Liberal Democrats will likewise not oppose the amendments further. I am pleased that the Government have seen fit to reflect on the representations that were made to them here and in another place, and in particular to the Delegated Powers and Regulatory Reform Committee in the other place, which produced an excellent piece of work at very short notice and was quite trenchant in its criticism of the Government. It made it quite clear that the proposal that was originally in clause 1, as it was when the Bill was before this House, was not an acceptable way of doing business. Indeed, I think that "unacceptable" was the term that the Committee used.
	I was intrigued by the Minister's reference to the relative brevity of the debate in the other place, and by his remark that it has lasted just in excess of two hours. I am sure that that would not be an implied criticism of the Secretary of State, who spoke on Second Reading in this place for the best part of an hour, as I recall.

Des Browne: He took a great many interventions.

Alistair Carmichael: He did indeed take a goodly number of interventions, as the Minister says. However, if that is an argument against the use of timetable motions, I can assure the Minister that he would have our wholehearted support if he should choose to pursue that argument with his colleagues in the Government Whips Office. I remain of the view that the limiting of the debate in this Chamber on Monday night to a Second Reading only—with no opportunity for the House to vote on the amendments that would have been considered in Committee—was, frankly, a disgrace. I have said that this is a mess of the Government's own making, and I remain of that view. What they have done, having gone to the other place, is to come back with the least bad option. On that basis, and in the interests of pragmatism, we are prepared to support the proposal.

Peter Robinson: I join the hon. Member for Orkney and Shetland (Mr. Carmichael) in condemning the Government for the procedure that they adopted in this House for this very important measure. There can be no more crucial issue in any democratic society than maintaining the purity of the electoral process, and there is no more serious constitutional matter than a Government stepping in to abort a democratic election.
	The Minister must recognise that the fact that some of his colleagues in the other place entered into a self-denying ordinance and therefore managed to complete their business in two or three hours without the kind of guillotine that we had does not take away from the fact that there were Members of this House who were unable to speak on Second Reading here, and that there was no debate at all on any of the amendments in Committee, never mind a Third Reading. That is an insult to Parliament and to parliamentary democracy, and it is certainly an insult to the people of Northern Ireland.
	The Bill as it has returned from the Lords is only marginally improved. The amendment allows the House to consider the matter should an order be made. However, allowing this Chamber to consider what would in effect be a denial of democracy in Northern Ireland might restore some democratic accountability to this House, but it does little to restore democratic rights to the people of Northern Ireland.
	The purpose of the Bill is to allow an election to be put off, not to allow an election to take place at a later stage. The Government have shifted their position consistently on the matter, from what appeared to be an undertaking to have an election in the autumn, to a hope that there might be an election in the autumn, to this Bill, which gives no undertaking to have an election at any specific time. I note that the Minister is not prepared to stake his political career on whether there will be an election in Northern Ireland for the Assembly in the autumn.

Quentin Davies: The hon. Gentleman, like me, will have heard the Secretary of State, who sadly is not here this evening, say clearly in the House on Monday that he intended that there should be an election in the autumn. I emphasise the word "intended". Those are strong words. We know the Secretary of State, we know that he is a man of his word, and we are entitled to believe, are we not, that that remark was made in good faith and that we can all look forward to an election in the autumn on that basis?

Peter Robinson: If the Secretary of State had told us what the factors were that would govern his intention, the House might be in a position to reach a conclusion. He might have been saying that he intended, if the conditions that he wanted to occur were favourable, to have an election. If one of the conditions that he wants to occur is such as to allow the right hon. Member for Upper Bann (Mr. Trimble) to win an election, it is probably fairly unlikely that the Secretary of State will have an election in the autumn.
	I can understand how any politician who has put a lot of time and effort into a particular strategy will want to do everything possible to safeguard that strategy. It is not, even from my point of view of being opposed to the Belfast agreement, difficult for me to understand why the Prime Minister, who has expended a great deal of time on supporting that agreement, should want to do everything conceivable to give continued life to that agreement. I do not find that at all surprising. What I find difficult is his inability to recognise that the Belfast agreement's season has passed; that the agreement has failed; that in effect it is finished. Simply because he does not like what the electorate are going to say, he cannot take away their opportunity to say it, which is effectively the purpose of the Bill.
	The Prime Minister knows that, should he allow democracy to seep into the process, the game is up. Any agreement that cannot survive a democratic test has come to the end of the road. The mess that the Government are getting themselves into comes directly from their refusal to face the reality that the agreement cannot survive. They have to face the reality that it has failed and that negotiations for a new agreement are the only way forward.
	Even with the Lords amendment in place and the Prime Minister constructing the most favourable circumstances from the shabby choreography that was outlined during the run-up to the Bill being introduced in the House, even if all the factors that the Prime Minister had wanted to take place had done so, the electorate would still reject the Bill. He may not like it, but the views that this party expresses are the views held by a majority of the Unionist community. The sunset clause inserted by the Lords will be of benefit only if the Government use the time to condition themselves to the reality that the agreement has to go and that a new agreement must be brought in.
	The Government have sought to suggest that the election is being cancelled because of the inability of the IRA to talk the talk. No thinking person believes that that is true. As one who was not waiting for the IRA to use any particular formulation of words, I found the whole word game fiasco completely bizarre. My colleagues and I are not interested in statements from the IRA. Frankly, we would not believe them or rely on them. Only deeds, viewed with the benefit of hindsight, are capable of convincing the Unionist people. The disarray that the leader of the Ulster Unionist party finds himself in today comes as a direct result of his taking the IRA at its word. No Unionist should make that mistake again.
	Approaching the word games as a disbelieving bystander, I never thought that anything stood or fell on the intentionally conditional and cynically devious language crafted by the IRA. Even using words that it has not used before means nothing if it has not lived up to the words that it used in the past.
	The Government were set for an election on 1 May not because the legislation required it to be on 1 May—the Secretary of State invoked the extraordinary power that he has to call an extraordinary election on 1 May. He did that without any words from the IRA. Again, the Government came to the House and set the date of 29 May, once more without any words from the IRA, but when the Prime Minister tells the public in Northern Ireland that he is satisfied that he has received two thirds of all that he asked from the IRA, the election is off.
	Frankly, we are not fooled by that. We all know that the reason is something other than that. The election was aborted to save the skin of the right hon. Member for Upper Bann. If he could have won the election, does anyone in the House believe that we would not have been out campaigning in Northern Ireland tonight? All parties wanted the election to take place except for half of the Ulster Unionist party.
	The Government ask us, "What would you have an election for in Northern Ireland if there is no prospect of setting up a Government afterwards?" The answer is easy. It is called negotiations. If there is deadlock after an election, the legislation provides for a process of negotiations. As it is, no one has a mandate to negotiate in relation to the Assembly in Northern Ireland. The Assembly has been dissolved, the Members of the Legislative Assembly effectively made redundant, although some finance is being provided for them under the Bill. The reality is that none of them has the democratic authority to negotiate on behalf of the people of Northern Ireland.
	Indeed, the Government included in previous legislation that they brought to the House designating 29 May as the date of the election a provision to ensure that the Assembly would not sit immediately after an election to allow negotiations to take place, so why do the Prime Minister and the Secretary of State ask in a rhetorical fashion, "Why would you have an election if you couldn't set up a Government?" Their own legislation provided the answer: negotiations could then take place with mandated politicians. I believe that the Government will find out just how easy it is to abolish an Assembly and just how difficult it is to set it up again afterwards. There has been plenty of experience of that in Northern Ireland over past decades.
	Although the House of Lords has made a marginal improvement to the Bill, there is still no commitment to an election. I do believe that it would benefit the House for us to divide on this issue, although if other Members do we shall be happy to join them; but at least the people of Northern Ireland will have an opportunity to see their elected representatives deal with this issue once more if the Secretary of State makes a decision during the next few months—or, if Lords amendment No.2 is agreed to, even if he does not.

David Burnside: When the commentators, of whom there are probably far too many in Northern Ireland, come to commentate on this period of history in the political process more commonly known as the peace process, the passage of this Bill will symbolise the ending of the possibility of devolution in Ulster in the foreseeable future.
	We in the Unionist community have no faith in the Government's returning in the next six months to organise an election in Northern Ireland that could create a workable, meaningful Executive or Assembly to try to offer Northern Ireland the benefits of devolution that have been offered, and are working with a certain amount of success, in Scotland and Wales.
	This is why I believe my prediction will be proved correct. The minute the Prime Minister announced the postponement of this election, the Provisional IRA withdrew its contact with de Chastelain. The Provisional IRA and Sinn Fein only react under pressure. They knew that they could not get in; they knew that they could not get anything unless they came back in. They were under pressure. There is no pressure on them now— and what messages are they getting from the British and Irish Governments? The joint declaration was conditional on acts of completion—the ending and disbandment of the IRA as an organisation, and the 100 per cent. conversion of Sinn Fein to a totally normal democratic party. They have no need to do those things, and they will not do them. They will maintain the pressure, they will maintain the army and they will maintain the threat, because the Governments who preside jointly over Northern Ireland have already made another tactical mistake. They already have the concessions on the watchtowers in South Armagh, and they will get more, as surely as day follows night.
	Whatever the Government say, the Unionist people no longer have any faith in this Government's restoring decent, accountable democracy in Northern Ireland. We will come back in the autumn, and I hope that I will be proved wrong. I hope that we will have a democratic election for the Assembly, and that the republican veto that this Government have not had the guts to stand up to will be removed from the democratic process in Northern Ireland.
	Like my hon. Friend the Member for Belfast, East (Mr. Robinson), I have no wish to divide the House, but this is a sad day for democracy in Northern Ireland. We are to have no local democracy, no election and none of the advantages of devolution in the Province.

David Winnick: I am a little confused, as I believe my hon. Friends may well be. What the hon. Gentleman has just said is virtually an echo of what the hon. Member for Belfast, East (Mr. Robinson) said. Do we take it that the views of the hon. Gentleman and the Democratic Unionist party on this issue are identical?

David Burnside: I think that the view across all sections of Unionism is identical: we would like a form of devolution in Northern Ireland. I think that the Ulster Unionist party, the DUP and the broad Unionist community agree that the republican movement continues to have a veto on progress towards devolution in Northern Ireland. If there is unity across the Unionist community, I welcome it.

Roy Beggs: Will my hon. Friend further confirm that we in the Ulster Unionist party, being totally committed to an election at the earliest possible date, like our Unionist colleagues in the Democratic Unionist party, had nominated and were prepared to take our message to the community at large in Northern Ireland, with absolute confidence of victory at the end?

David Burnside: My hon. Friend is correct. I put in my Assembly candidate nomination papers last Friday; indeed, the Ulster Unionist party, along with many other parties, put in nomination papers throughout Northern Ireland. We wanted an election and I was looking forward to one for a single reason: to end the veto of the men of violence who use terrorism, and to replace that threat with democratic, accountable government at Stormont. We do not have democratic, accountable government at Stormont because there is a veto from the republican movement that this Government will not face up to.

Nigel Dodds: I want to make a few brief comments, as several of the issues have already been dealt with. I reiterate the comments of other hon. Members about the disgraceful proceedings that have accompanied the process governing this legislation. Frankly, for Members of this House to have no opportunity in Committee or on Third Reading to move amendments or to speak is disgraceful. [Interruption.] The Minister may want to reply to that point directly, rather than by speaking to one of his colleagues from a sedentary position. However short a time the House of Lords, an unelected body, may have spent in Committee on individual clauses, at least it had that opportunity, whereas the elected representatives of the people of Northern Ireland and of those throughout the United Kingdom had no opportunity for detailed consideration of this very important legislation, which deals with the democratic process in Northern Ireland. The Bill was not timetabled but guillotined—a distinction that was made clear in the House the other day. That makes the Government's actions all the more reprehensible.
	The amendments constitute the slightest of improvements. They make no outstanding change to the Bill's substance, in that there is still no date for an election. There is a quasi-sunset clause, and the provision before us will ensure that the matter has to come before the House again if the Secretary of State makes an order. However, the people of Northern Ireland have been denied their right to have their say in an election on 29 May—the second time in a month that they have been denied their right to speak at the polls. That has gone down very badly across all sections of the community in Northern Ireland.
	As my hon. Friend the Member for Belfast, East (Mr. Robinson) said, all the parties in Northern Ireland, bar half of one, wanted this election to take place. I listened with interest to the intervention of the hon. Member for East Antrim (Mr. Beggs). His comments are at odds with those of his senior colleagues in Belfast, and across Northern Ireland, on the pro-agreement wing of the Ulster Unionist party. In the press at home, they were calling virtually daily for the elections to be put off. Indeed, his comments are also at odds with those of his party's leader, the right hon. Member for Upper Bann (Mr. Trimble), who congratulated the Government and welcomed the statement when the Prime Minister and the Secretary of State made it in this House. The people have been denied their choice at the ballot box, and that has been met with the support of the leader of the Ulster Unionist party, but with denunciation from all the other parties in Northern Ireland.
	The irony is that this legislation is progressing through Parliament to stop an election that has already happened. As a result of this provision, the House could end up debating the Secretary of State's decision when the election is already under way, if it is called in the autumn. That is the nonsense of the Government's position. They will end up bringing matters to the House for decision after the elections have already started in the Province.
	The campaign has started, de facto, but the Secretary of State tells the people of Northern Ireland not to nominate candidates, because legislation will be put before the House of Commons. In other words, they should ignore the law, the wishes of Parliament and what Parliament might do. The suggestion is that we should assume what Parliament will do but forget about all the demands of the electoral process. According to the Electoral Office for Northern Ireland and the chief electoral officer, the elections are under way as we sit here tonight. Expenses are being racked up and the other processes are continuing.
	In the autumn, the elections could be announced and halfway through the Government would come to the House to ask whether it approved. That is the nonsense of the situation that the Government are in. They should have let the elections proceed on 1 May, or at the latest—if they had to be postponed—on 29 May. Let the people have their say.
	Lords amendment agreed to.
	Lords amendment: No. 2.

Des Browne: I beg to move, That this House agrees with the Lords in the said amendment.
	Another concern raised in the House was that the power to hold elections was open-ended. The hon. Member for Orkney and Shetland (Mr. Carmichael) referred to the welcome and helpful report from the Delegated Powers and Regulatory Reform Committee in the other place. It was this aspect of the Bill that the Committee described as unacceptable, recommending, in paragraph 7 of its 20th report, dated 12 May 2003, that
	"the House seek a way of defining the enabling power and including in the definition proper Parliamentary scrutiny."
	An earlier section of the report shows that the Committee, acting expeditiously, described the other delegations in the Bill—those outwith clause 1—as
	"both appropriate and subject to an appropriate level of Parliamentary scrutiny."
	I am grateful for those observations.
	As we heard earlier, some hon. Members looked for the Bill to fix a date for an election, or a deadline by which one might be called. The Government continue to think that that would be undesirable. We do not believe that it would advance the restoration of a functioning system of government, or more stable politics in Northern Ireland. What is necessary to the restoration of functioning devolved institutions in Northern Ireland is absolute clarity about the future of paramilitarism, and confidence in the stability of the institutions. That is how we will get functioning institutions. Setting a date will not provide them. Setting a date now for an election in the autumn would effectively mean that the campaign would begin now. I have read the report of the Second Reading debate and it is clear that a substantial part was taken up with campaigning. That is not how we should create a propitious environment for political dialogue and political advance. Indeed, the opposite is true—as that debate showed.
	However, it is right to set some bounds to the power and provide further opportunities for parliamentary scrutiny. Accordingly, we have tabled an amendment that would require the Government to return to Parliament to extend the power if it has not been exercised by 15 November, which is six months from tomorrow, when we hope that the Bill will gain Royal Assent. It would then be renewable, under the amendment, for periods of up to six months thereafter.
	I can also say that it is certainly our intention, if there has been no election by that date, to renew the powers. Indeed if we formed the opposite view—that the power should lapse—we should seek to ensure that the House had an opportunity to consider the question if it wished, before the powers were lost. My right hon. Friend the Chief Whip has authorised me to say that the debate on renewal this autumn—if, regrettably, we have not had an election by then—would be taken on the Floor of the House. However, I stress that it is our intention to have an election by the autumn.

Alistair Carmichael: I note that the Minister chose his words with some care when he said that the debate this autumn—and, obviously, any vote—would be taken on the Floor of the House. Would that be the case also with subsequent orders that would appear at intervals of six months thereafter?

Des Browne: I am almost certain that it would. However, I am in a position to give the House an undertaking that a debate this autumn would be taken on the Floor of the House. I hope that the House will find that, with these changes, the Bill has been improved.

Lady Hermon: The Minister is highly respected for his expertise in human rights, and he rightly emphasises those matters whenever an opportunity arises. However, the Bill carries a statement that says that it is compatible with the UK's obligations under the European convention on human rights. The Minister will know that, in the recent Matthews case, the Assembly of Northern Ireland was held to be the relevant legislature, with full legislative powers. Will the Minister assure the House that, if the elections are delayed repeatedly, it will be compatible with human rights obligations to hold elections to the legislature at reasonable intervals?

Des Browne: I am in a position to give the hon. Lady that assurance. She would be surprised if I had not considered those very issues, and I have considered them.

Nigel Dodds: The Minister said that the Secretary of State could come to the House in the autumn to extend the power to call an election. Does that also include powers to extend the salaries, allowances and other benefits enjoyed by former Assembly Members?

Des Browne: The hon. Gentleman will be familiar with the provisions of the Bill, which allow the Secretary of State to make provision for the salaries of Assembly Members. My right hon. Friend indicated on Second Reading that it was still the Government's intention to review that matter after six months. However, it is the Government's intention to consult parties in Northern Ireland, including the hon. Gentleman's party, about that aspect of the Bill and its implementation. I look forward to taking part in those consultations with him and his colleagues.
	I know that many hon. Members disagree with the Bill, and I understand the strength of their feelings. I hope that they will also acknowledge that the Government have acted in the way that we consider to be in the best interests of the agreement, and of the development of stable Government and a peaceful future in Northern Ireland.
	I commend the amendment to the House.

Quentin Davies: I thank the Minister for his clear assurance that any debate on renewal of the powers will be taken on the Floor of the House. That is indeed the assurance that we sought, so we shall not oppose the amendment.
	This short debate has been rather good. After the disgraceful events of Monday, when the House did not even get to the end of Second Reading on this important Bill, the debate has at least offered us another opportunity for people to express themselves.
	It is a pity that the Secretary of State was not able to be here, and that the Prime Minister was unable to be here either on Monday or this evening. On Monday, the Prime Minister would have heard speeches from members of all three parties in Northern Ireland represented in this House—the Social Democratic and Labour party, the Ulster Unionist party and the Democratic Unionist party. This evening's speakers included the hon. Members for Belfast, East (Mr. Robinson), for Belfast, North (Mr. Dodds) and for South Antrim (David Burnside). Those three hon. Members on the Unionist side all said more or less the same thing—that the decision was fundamentally wrong. The Government would be inconceivably stupid if they did not take careful note of that.
	The Minister is good at trying to put a good face on bad news. It made me smile when he said that the report on the Bill produced by the Lords Committee on Delegated Powers and Regulatory Reform was helpful. In fact, the Committee said that the Government's proposal to postpone the elections indefinitely was unacceptable. That is extremely strong language for a Lords Select Committee to use about a Government measure; it shows what a disgraceful decision and mistake the Government have made.
	The situation has not been improved by the Government giving the House non-credible, even shifty, explanations that no one could believe, which is an insult to the intelligence of any rational person. The idea that the elections are being suspended or postponed to punish Sinn Fein-IRA, when in fact all the democratic parties in Northern Ireland, which object to the measure, are being punished, flies in the face of any notion of justice.
	Even more insulting is for the Government to say that the elections are being postponed to punish Sinn Fein-IRA for non-compliance, when, as the hon. Member for Belfast, East so eloquently said, and as I said on Monday, there was no suggestion from the Government that the elections could not be held when Sinn Fein had not complied at all and had not even clarified the three essential points. Now that it has clarified two of the three, the Government say that it must be punished. That is completely absurd. It is insulting to the House. The Government cannot be serious; if they were, they would not be acting in this wholly irrational and completely lunatic fashion.
	As I have said over and over again, the only way to deal with Sinn Fein-IRA is straightforwardly and in good faith. If they do not comply or if they behave badly, they must be punished and appropriate sanctions must be taken.

Lady Hermon: Will the hon. Gentleman give way?

Quentin Davies: In a moment.
	If Sinn Fein-IRA make positive moves, we should make equivalent positive gestures in return. If Gerry Adams made positive comments, it would be utterly ridiculous to respond by saying, "Now we are going to find a new way of punishing you". It would be completely cuckoo.
	However, as the hon. Member for Belfast, East said, the IRA has not actually done anything yet. A comprehensive settlement depends on a programme of implementation. Only when everybody is clearly complying in deed as well as in word will it be possible for us to make corresponding moves in deed as well as in word. It is thus crazy for the Government to dismantle the two towers in south Armagh, or to promise to do so. Even if it was possible according to the advice that they have received from the General Officer Commanding or the Chief Constable—

Mr. Deputy Speaker: Order. I have given the hon. Gentleman a little latitude, but I must remind him that we are not discussing the Bill in general; we are discussing Lords amendment No. 2.

Quentin Davies: We are indeed, Mr. Deputy Speaker, but as I shall not be trying to catch your eye again this evening I wanted to respond to some of the important points that had been made on both sides of the House.
	As I said, we have had a good debate, but—

Mr. Deputy Speaker: Order. The hon. Gentleman must not flout my ruling or indeed the conventions of the House. So far, only one speech has been made in this debate. The hon. Gentleman cannot reply to matters that were dealt with either in the debate on Lords amendment No. 1 or at any previous time. He really must direct his remarks to Lords amendment No. 2.

Quentin Davies: That is absolutely right, Mr. Deputy Speaker. On amendment No. 2, I hope that we do not have to debate this subject again and that the Government are not thinking of again rolling forward the postponement of the elections.

Nigel Dodds: Will the hon. Gentleman give way?

Quentin Davies: I shall give way in a second.
	As I have said before, if there is a further postponement that goes beyond 1 December—the date for review—I fear that will be the end of the agreement and of the peace process that we are working to fulfil. That would be an enormous historical tragedy.
	If the hon. Member for North Down (Lady Hermon) still wants to intervene, I shall give way first to her and then to the hon. Member for Belfast, East.

Lady Hermon: I am grateful to the hon. Gentleman; it is always a pleasure to intervene in his speeches—it is an even greater pleasure when he actually gives way. He knows very well indeed, as do other hon. Members, that the Assembly was suspended last October, so will he please address the constitutional point that, if the elections had gone ahead as scheduled on 29 May, the Assembly could not have met the following day, and that the electorate would have been asked to turn out to vote on a suspended Assembly?

Quentin Davies: No, the hon. Lady is not correct. If the Assembly were elected, it would no longer be suspended—it would be in place, and it would be able to do its job.

Peter Robinson: I want to put a question to the hon. Gentleman that relates to Lords Amendment No. 2 and, in particular, the new date set by the Government—15 November—by which time they would bring this issue back to the House if no agreement to hold an election had been reached. The Government have said, "Clarity is our friend"—I think that was the term used by the Prime Minister—so do they not owe it to the House to make it abundantly clear before this debate ends what requirement has to be met for an election to place? Are only words from the IRA required? Are there any other factors? We should be clear, up front, about what is required for an election to take place.

Quentin Davies: The hon. Gentleman asks extremely pertinent questions, and to give the Under-Secretary time to respond to them, I shall now conclude my remarks.

Alistair Carmichael: I very much hope that the undertaking given by the Under-Secretary with regard to any order under Lord Amendment No. 2 that may need to be debated in the House this autumn will extend to any subsequent order that might prove necessary. That was certainly the basis of the understanding that I understood to have been reached between me, the Under-Secretary and the hon. Member for Grantham and Stamford (Mr. Davies), and I hope that the usual channels will bear that in mind. I would certainly view anything other than that as a breach of trust between us and the Government, and I very much hope that that will not be the case.
	May I say in passing that the moves that have brought us to this stage since we discussed the Bill on Second Reading reflect creditably on the Under-Secretary, who has shown himself capable of listening and responding to the concerns of the House? As someone who is new to such discussions between those on the Front Benches, I should like to place on record my appreciation of the efforts that the Under-Secretary, his colleagues in the other place and, indeed, the hon. Member for Grantham and Stamford and his colleagues in the other place have made to expedite matters and to deal with this issue in a way that allows some certainty to be injected at last into the situation. As I have said before, we would not choose to place ourselves in this situation, but, given what has been done, we have done the best that is possible in the circumstances.

Martin Smyth: I share the concerns expressed by the hon. Member for Orkney and Shetland (Mr. Carmichael), and I raised them earlier. I also pay tribute to the Under-Secretary for his integrity. He shared with us the fact that it was his intention that there would be an election, but he will remember the immortal bard who said that the best laid plans of mice and men oft gang a-gley. To show that we are impartial, since the majority of Members are English, Shakespeare said that the road to hell is paved with good intentions.
	Some of us are concerned about the concept of introducing a six-month delay because we bear in mind the fact that the prevention of terrorism provisions had to be constantly reintroduced for years. We therefore stand by the concept of election for a devolved assembly.
	May I press the Minister again following the intervention of my hon. Friend the Member for North Down (Lady Hermon), bearing in mind that the hon. Member for Belfast, North (Mr. Dodds) raised the question about continuing to pay the salaries of current Members? Is not there a danger that a nominee for election who is not already an Assembly Member could complain, under human rights legislation, that there is not impartiality, because people who are not working are getting money to continue to campaign, whereas new candidates must work and are placed at a disadvantage? Will he reconsider his undertaking that that is in keeping with the human rights legislation?

Des Browne: In the few minutes that I have left, I shall try to deal with some of the issues that have been raised. If I may respond to the issue raised by the hon. Member for Belfast, South (Rev. Martin Smyth) in his peroration, I gave a reassurance that this legislation does not infringe the state parties undertaking under article 3 of the European convention on human rights. That is my view, which I reached after considering the issues involved, and that view is expressed in terms in the explanatory notes to the Bill.
	The hon. Gentleman raised another point, which was also raised on Second Reading, and I shall give him the same response that the Secretary of State gave: any incumbents in the period between the dissolution of an Assembly or Parliament and an election, if they are being paid, as is the case in all assemblies and Parliaments in the United Kingdom, could be said to be operating at an advantage to those who seek to oppose them in an election. Nobody would be any different in that respect. We must bear in mind, however, that that situation cannot run indefinitely. The Secretary of State will bear that in mind in relation to the scheme developed for payment of those who were Assembly Members.
	Secondly, I want to reinforce the point that was made in an intervention by the official Opposition spokesman. It is perfectly clear under the law as set out in the Northern Ireland Act 2000 that a new Assembly would not automatically meet after an election unless suspension was lifted. That is the state of the law at present.
	In response to the hon. Member for Belfast, East (Mr. Robinson), I can do no better than to quote my right hon. Friend the Prime Minister, when speaking in Belfast on 17 October, and the Government have been consistent to that position since—

Mr. Deputy Speaker: Order.

John Taylor: That was going to be his best point.

Mr. Deputy Speaker: Well, we shall never know.
	It being one hour after the commencement of proceedings, Mr. Deputy Speaker, pursuant to Order [12 May], put forthwith the Question necessary for the disposal of business to be concluded at that hour.
	Lords amendment No. 2 agreed to.

PETITIONS
	 — 
	Autism

Stephen Ladyman: This petition is supported by more than 5,000 signatories and a substantial number of letters of support and e-mails. It was organised by Autism in Mind as an activity for autism awareness year 2002, and it was largely collected by Mr. Terry Rutherford, who carried out a nationwide tour of the United Kingdom during November last year, ultimately presenting the petition at Westminster to me and to my hon. Friends the Members for Sunderland, North (Mr. Etherington) and for Ilford, North (Linda Perham).
	The petition reads:
	To the House of Commons.
	The petition of citizens of the United Kingdom.
	Declares that autistic spectrum disorders now affect 96 in 10,000 people, that autism is a complex disorder and people with autism have specific and complex needs and, to that end, Mr. Richard Exley who has Asperger's syndrome, has drawn up a "call for action" to improve services for autistic people.
	The Petitioners, therefore, request that your honourable House will require Her Majesty's Government to address the "call for action" and ensure that a diagnosis of autism should be made by a practitioner with an understanding of autism, that such a diagnosis should be the key to unlocking the range of public services that an autistic person requires, that such services should be tailored to an individual's needs and be available throughout life and that substantial investment will be made in improving the range and quality of such services and ensuring their availability throughout the United Kingdom.
	And the Petitioners remain, etc.
	To lie upon the Table.

Community Pharmacies

David Taylor: Community pharmacies play an immensely important role in the delivery of high-quality health care to the people of North-West Leicestershire. I am presenting a petition signed by more than 1,100 constituents who are extremely concerned about the recommendations made in an Office of Fair Trading report, which they believe threaten the future of community pharmacies in Ashby, Castle Donington, Kegworth, Coalville, Ibstock, Measham and elsewhere.
	The petition reads as follows:
	To the House of Commons.
	The Petition of electors within the Parliamentary constituency of North West Leicestershire.
	Declares that they are concerned about proposals that would allow unrestricted opening of pharmacies able to dispense NHS prescriptions and (to preserve local pharmacies and safeguard their continued service to local communities).
	The Petitioners therefore request that the House of Commons reject the proposals from the Office of Fair Trading on pharmacies.
	And the petitioners remain, etc.
	To lie upon the Table.

SHOP WORKERS (CRIMINAL ATTACKS)

Motion made, and Question proposed, That this House do now adjourn.—[Dan Norris.]

Tom Watson: I am pleased to have secured this Adjournment debate to raise the worrying and growing issue of criminal attacks on shop staff. Thousands of workers in my constituency and some 2.7 million people across the country are employed in the retail sector. So it is right that we address the risks and abuse that they face.
	I know that the Home Office does not collect specific statistics on attacks on shop workers, but the number of thefts from shops is on the rise. In the West Midlands police force area, the number of recorded offences rose by 12 per cent. in the past two years, from 17,891 incidents in 1999–2000 to just over 20,000 thefts in 2001–02.
	The retail crime survey published by the British Retail Consortium gives an idea of the number of attacks on shop staff. Last year, it found that 20,000 staff were physically assaulted in 2001—a 40 per cent. increase in just over a year. Some 28,000 staff were threatened, 68,000 were verbally abused and many more incidents go unreported. Staff in small and medium-sized retail outlets such as garages, newsagents and off-licences continue to be more susceptible to attack. The BRC found that 12 in every 1,000 staff in the small and medium-sized enterprise sector were subject to physical violence compared with seven per 1,000 staff for larger retailers. Small stores are less likely to have security measures, such as CCTV and in-store guards, but more likely to have staff working on their own, often late at night.
	Last year, a young manager at the Lidl supermarket in the Hamstead area of my constituency was viciously and violently attacked by a man with a baseball bat. Like thousands of shop staff across the country, he was working late at night with no security or support.

Mark Tami: Although I obviously accept that employers need to do much more to protect staff, does my hon. Friend agree that they also need to put more resources into training staff, especially in conflict management techniques, so that they can defuse such situations before they become violent?

Tom Watson: I agree. Retailers have to take responsibility not just for the security of the store, its goods and the contents of the tills but for their staff, who are often vulnerable and to whom they owe a clear duty of care. Obviously, training is a key element of that.
	Under section 2 of the Health and Safety at Work, etc. Act 1974, employers are obliged to protect their staff against foreseeable risks. While many employers are good at undertaking such duties, some do not take staff safety seriously and many cannot afford to do so. Small, ill-protected businesses are vulnerable, but large stores are targets for serious criminals. The Safeway superstore at the heart of West Bromwich town centre, for example, was recently the victim of an armed robbery.
	We have to dispel some myths about retail crime. First, it is not a victimless or faceless crime. Shoplifting is not a harmless or inoffensive pastime, but is often a clear indicator of serial criminality. Furthermore, two thirds of violence against shop staff is committed by shoplifters caught in the act. A 45-year-old shop assistant, for instance, was injured trying to stop a heroin addict taking less than £100 from a till. Shoplifting is increasingly linked to violence, substance abuse, street crime and truancy. It costs £2.4 billion every year and is a crime not just against businesses but against communities and ordinary shop staff who go to work every day to earn a living and who often feel let down by judges and magistrates. Retail crime has become an occupational hazard. Violent thieves, aggressive shoppers and abusive customers are making life a misery for retail staff. For too long, shop workers and companies have accepted that behaviour as part and parcel of the job.
	That should not be the case. Staff should be free to go to work without fear of being attacked or abused. Under the leadership of Bill Connor, the Union of Shop, Distributive and Allied Workers, which represents 320,000 retailers in the UK, has highlighted the problems and risks faced by its members day in, day out. Its "Freedom from Fear" campaign, masterminded by deputy general secretary John Hannett, rightly called for a zero tolerance approach to violence and abuse in the workplace. Its charter of respect for shop workers, which aims to provide safety and dignity at work, has already been signed by some of Britain's leading retailers, including Sainsbury's, the Co-operative Group, Littlewoods, Morrisons and Iceland, as well as the British Retail Consortium itself. Its national petition has attracted thousands of petitions in support of the campaign.
	On 17 September, USDAW will hold a national respect day, which I hope will become an annual event. It is designed both to celebrate the vital role that millions of shop workers play in the community and the UK economy and remind the shopping public that shop staff are parents, friends, sons, daughters, wives and husbands, not just faceless individuals on a till. Shop workers are sometimes literally at the front line of the retail industry. They keep our economy going and politicians, employers and customers should recognise and respect that on 17 September. Will the Under-Secretary back the national day of respect, and will he join me in paying tribute to the union for fighting such a strong campaign on behalf of its members and all retail staff?
	Has the Minister had a chance to read USDAW's report on shop workers' experiences of work-related violence and abuse entitled "Voices from the Frontline"? It does not make for easy reading. Julie Banks, an USDAW rep from Walsall, recalls:
	"One Sunday a manager ran out and took a female member of security from the precinct. There was a bunch of young lads pinching alcohol. They actually dragged the security guard round the street and the female manager that came from our store was helpless. She couldn't do anything, because if she had tried to intervene they would have got her as well."
	Julie goes on to say:
	"To do your job to the best of your ability is to please the customer, but some are so unreasonable that you can't do that. And it upsets you if they start becoming abusive, especially if there's no manager around. Usually if you answer back or if you say anything, then they'll report you and you're liable to get into trouble for it."
	Julie also tells of a 16-year-old trainee who was slapped in the face by a customer because she was a bit slow on the till.
	Sadly, that old motto in the retail profession, "The customer is always right", is no longer true. On average, at least one shop worker is attacked every hour of the working day. Almost half of those surveyed by USDAW reported physical attacks or assaults on staff in the past 12 months, like the security guards at a Tesco store in Oxford who were bitten by a shoplifter who was HIV-positive, and had to spend months taking a cocktail of anti-HIV drugs, or the 70-year-old newsagent's assistant who suffered head injuries after he was beaten up during a raid in Wolverhampton.
	Nearly three quarters of staff have been threatened with violence, like the cashier at a Thresher's off-licence in Walsall, who was pulled over a counter and threatened with a screwdriver by masked robbers, who made off with a haul of cash, cigarettes and cans of beer. At one in four stores, threats are made every week. Verbal abuse is a daily event in more than a third of stores, most commonly when young people are refused alcohol, but also when refunds cannot be given without proof of purchase, and if there are queues at the checkouts or even stock shortages. The legal duty to refuse alcohol sales after licensing hours in 24-hour stores is also a common flashpoint.
	Not surprisingly, the daily onslaught of verbal abuse and the fear of violence is taking its toll on the UK's shop workers. Stress-related problems are common and include sickness and nausea, insomnia, headaches, stomach upsets and clinical depression. Almost half of staff have taken time off as a result of violence. The trauma and stress can last a lifetime, and many staff are leaving the retail sector altogether because of fear of violence and abuse.
	The Home Office's British crime survey shows that shop workers are three times more likely to be assaulted or threatened than the average British worker. In its list of jobs with the highest risk, retail sales managers came fifth and retail cash desk or checkout operators came 13th. However, the picture is not entirely gloomy. The way forward is collaboration between unions, retailers, police, local authorities and Government. Partnership has been proven to work on the ground.
	Birmingham's retail crime reduction partnership is one good example. Eight hundred retailers are signed up to the scheme, with local police and the city council. By working together, having safety in numbers and sharing information and intelligence, small shops and large retailers alike have greater strength in partnership than when acting alone. With the help of a shared database of photographs, once an offender has been banned from one shop, they can be banned from every store in the scheme, so through a network and a system of support for local shops, criminal activity can be deterred and town centres made more secure. Since Birmingham's retail crime operation was set up in 1999, shop crime in the city centre has fallen by a fifth and there are now fewer than 2,000 incidents a year. That is still too many, but it is a huge step forward in making the city centre safe and a more attractive place for both shoppers and staff.
	Retail crime reduction partnerships certainly make a difference, but is my hon. Friend aware of the business intelligence crime system? The BICS computer database is a key weapon against persistent offenders. It collects, disseminates and uses retail crime intelligence in an entirely new way to allow crime analysis by type of store attacked, type of merchandise stolen and its value, particulars of the offender's modus operandi, details of the day and time of attack, and the name and aliases of the offender, together with circulation of a CCTV or police photograph and any previous retail crime history.
	The BICS database has been installed or is about to be installed in up 250 town or shopping centres that have established retail crime reduction partnerships. I understand that there has recently been a bid to the Home Office from the British Retail Consortium to establish the BICS scheme nationwide at a cost of just over £1 million over three years. Such a database could link up information from tens of thousands of stores, and allow intelligence on travelling offenders to be shared across the country. The long-term benefits of extending BICS would undoubtedly outweigh the initial outlay. Businesses would save money, shoplifting and theft would be reduced and, as a result, shop workers would face fewer assaults and attacks. I hope that the Minister and his Department will have an early opportunity to look at the bid and perhaps talk to the British Retail Consortium and USDAW about the project.
	Will the Minister also give a commitment to continue providing sustained funding for retail crime reduction partnerships and other local schemes to prevent retail crime? Simple though often expensive deterrents such as CCTV cameras and security guards improve safety and security, deterring shoplifters and protecting staff. Not leaving staff to work alone further reduces the risk of danger. Retailers spent £750 million last year on crime prevention strategies such as CCTV, alarm systems and product tagging.
	Together with local authorities, the Government have also helped to increase the network of CCTV cameras on our high streets and key trouble spots. For instance, the £15 million CCTV funding for small retailers in deprived areas announced by the Home Secretary in June 2001 was very welcome. Improved security lighting, locks and gating schemes are also making a big difference. I hope that the Minister can give an assurance today that such financial support can be maintained and built upon in years to come.
	Retail crime is not an isolated issue and it cannot be tackled in isolation. Since many of the thugs who abuse, assault and threaten shop staff also commit other offences, tackling retail violence will help in the battle against other forms of crime too. The measures that the Government are already taking to reduce crime, including street crime and antisocial behaviour, should have a positive impact on cutting attacks on shops and their staff.
	A survey of experiences of crime among residents in the Hamstead and Great Barr areas of my constituency found, perhaps not all that surprisingly, that local people want to see more police on the streets. That is a traditional solution to cutting crime, but a visible police presence can often be the best deterrent of all. In West Bromwich, East, we welcome the Government's commitment to increase police numbers. We now have more than 7,800 police officers in the west midlands area, and if current levels of funding and recruitment continue, we can keep on expanding the strength of the force. We are looking forward to the appointment of the first 40 community support officers in the west midlands. Let us hope that they will be the first of many, as they will help to provide that very important visible presence on the streets and free up regular officers for front-line tasks.
	Partnerships, computer databases, CCTV and more police on the beat are all key parts of the battle against retail crime, yet we must not lose sight of how long-term planning can make a difference too. When town centres are regenerated, local stakeholders must work to ensure that tackling retail crime and antisocial behaviour is a prime consideration.
	My borough, Sandwell, is gearing up for a transformation over the next decade. The centrepiece is the exciting redevelopment of West Bromwich town centre—a project that includes the recently opened bus station, the c/Plex arts centre, a new Tesco superstore, a police station and a one-stop health centre. We are trying to build so that the shopping centre and surrounding areas are safer for those who live, shop and work there. Will the Minister, together with his colleagues in other Departments, look at collating best practice from those who are involved in the redevelopment of town centres, so that innovative ways of reducing crime through planning and good design can be shared?
	This year's retail crime survey is due to be published in less than a month's time. Indications suggest that it will show that most injury is caused to staff who are trying to detain shop thieves, that violent robberies are also on the increase and that drug and alcohol-induced crime is on the rise. That can only make more urgent the need to fund drug prevention and treatment programmes. The figures will certainly make for interesting reading, and I hope that the Minister will have a chance to examine and reflect on the findings of the report when it is published. Without doubt, it will show that Britain's shop staff continue to face attacks, assaults, threats and abuse in the course of their working day. To their credit, USDAW and the British Retail Consortium are taking action on behalf of their members at a local level and raising the issue with policy makers at a national level.
	With the Government's support tonight, we can say no to retail crime, abusive customers and drunken and drug-fuelled attacks, and put a stop to the escalating criminal attacks made on millions of our hard-working shop staff.

Bob Ainsworth: I congratulate my hon. Friend the Member for West Bromwich, East (Mr. Watson) not only on securing the debate, but on the work that he has done locally and in association with USDAW—the Union of Shop, Distributive and Allied Workers—on the issue of retail crime. Any form of violence is totally unacceptable and should not be tolerated, and everybody has a right to go about their work without fear of physical assault or intimidation or verbal abuse. One cannot underestimate the detrimental effect throughout the community of crime against business and the damaging effect on people's lives, businesses and families. My hon. Friend is absolutely right to point out that it is not a victimless crime. Retail crime costs us all as customers—we pay for the costs to business—and there is a hugely disproportionate cost for those who face situations such as those described by my hon. Friend in dealing with violent and abusive customers and others.
	My hon. Friend is right to stress the importance of the need to protect shop workers from criminal attack. He highlighted USDAW's "Freedom from Fear" campaign, which is meant to raise awareness of this issue. I have recently corresponded with the deputy general secretary of USDAW, John Hannett, on the matter and in response to specific concerns that he has raised. I know that my hon. Friend tabled an early-day motion on the issue.
	Under the Health and Safety at Work, etc. Act 1974, all employers have a legal duty to ensure, so far as is reasonably practicable, the health, safety and welfare of their employees. That duty includes risks arising from violence at work. The Health and Safety Executive encourages employers to manage work-related violence. It has published a general guidance, "Violence at work: a guide for employers", to help them tackle work-related violence in accordance with their duties under the law. The HSE has also published specific guidance for the retail sector, "Preventing violence to retail staff", which provides practical guidance for retailers and their staff on how the problems and causes of violence might be tackled, setting out an approach that can be adopted as everyday practice.
	Under the three-year programme to help employers tackle workplace violence, the HSE has published new guidance entitled, "Work-related violence: managing the risk in smaller businesses", which is designed to help smaller businesses manage the risk of work-related violence. It has commissioned research to find examples of good practice in preventing and managing violence to lone workers—my hon. Friend pointed out how vulnerable people often are in smaller establishments—and funded the development of the new occupational standards in managing work-related violence to provide employers with a sound framework on which to develop detailed policies on work-related violence. The HSE held a major joint conference with the TUC last December to raise awareness of violence in the workplace and to share good practice. The deputy general secretary of USDAW, John Hannett, spoke at that event.
	My hon. Friend mentioned the scheme that was announced by the Home Secretary and the allocation of £15 million to improve security for small retailers in deprived areas. That funding has been provided to make security improvements to individual shops and shopping parades and to help local shops tackle crime and disorder problems on their doorstep. We helped more than 3,000 shops in the first year and 4,500 shops in the second year. With the £6 million that we shall allocate in this financial year, we hope to provide help for a further 5,500 shops.
	We also continue to support retail crime reduction partnerships, which we helped to establish. Several regional Home Office directors have provided specific support in their regions to help them play their full part in crime reduction work. It is understandable that those partnerships have tended to focus on excluding offenders from major retail centres. Although that successfully reduces the incidence of shop theft and violence against shop customers, it does not necessarily have the impact that we would like on tackling the causes of crime. We are currently exploring the possibility of a pilot project to extend schemes to exclude shoplifters from shopping centres and include access to drug treatment, which is often involved in such cases.
	It may be an opportune time to take the partnership work forward and examine some other issues, such as the usefulness of the database. Perhaps a meeting should be held with the British Retail Consortium and USDAW to explore ways in which to develop the partnerships. I know that my right hon. Friend the Member for Southampton, Itchen (Mr. Denham) was especially keen to try to develop that aspect of the work and to look beyond the immediate towards a preventive framework. If we can link retail partnerships' information with the preventive work that we are expanding in the updated drugs strategy, perhaps we can have a genuine impact on continuing violence.
	My hon. Friend the Member for West Bromwich, East mentioned the day of respect. We are considering a genuine problem. Not only retail staff but some workers in the public sector face a complete disregard for their safety and a general lack of respect from elements of our society. Every day should be a day of respect. If the day that is requested will help to hammer home the message, it is worth supporting. I have read the pamphlet, "Voices from the Frontline". My hon. Friend is right that the catalogue of appalling examples does not make comfortable reading. It is sometimes necessary for organisations to produce such pamphlets to try to illustrate and make people aware of such appalling situations.
	We can do a lot in partnership. I have spoken to representatives of the British Retail Consortium and USDAW separately and together over a period of time. I know that my hon. Friend has also done that. We need to try to develop that relationship and get the most out of the partnerships to evaluate all the potential working practices and best practice around the country. I know that my hon. Friend will be keen to follow up those ideas. I am more than happy to try to facilitate that after this evening's debate.
	Question put and agreed to.
	Adjourned accordingly at eleven minutes to Nine o'clock.